UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
[X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended
December 31, 2007
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ______________ to
___________________
Commission
file number 0-23367
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BIRNER
DENTAL MANAGEMENT SERVICES, INC.
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|
(Exact
name of registrant as specified in its
charter)
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COLORADO
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84-1307044
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|
|
(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer
Identification
No.)
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3801
EAST FLORIDA AVENUE, SUITE 508
DENVER,
COLORADO
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80210
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|
|
(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number: (303)
691-0680
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, without par value
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Nasdaq
Capital Market
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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|
(Title
of Class)
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [
] No [ X ]
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ] Accelerated
filer [ ] Non-accelerated
filer [ ] Smaller reporting
company [ X ]
(Do not check if a smaller
reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [ X ]
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
|
Class
|
Shares
Outstanding as of March 24, 2008
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|
|
Common
Stock, without par value
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2,108,805
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The
aggregate market value of the registrant’s voting stock held by non-affiliates
of the registrant computed by reference to the last reported sale price of its
Common Stock as of June 30, 2007, the last business day of the registrant’s most
recent completed second fiscal quarter, was $27,481,973. This calculation
assumes that the registrant’s executive officers, directors and persons owning
5% or more of the outstanding Common Stock as of such date may be affiliates of
the registrant and that 1,246,348 shares of Common Stock are held by
non-affiliates.
On July
13, 2005, the registrant announced that its Board of Directors had declared a
2-for-1 stock split of its common stock. The 2-for-1 stock split,
which was effected as a dividend, was distributed on August 8, 2005, to
shareholders of record at the close of business on August 1,
2005. The stock split increased the number of shares outstanding on
August 8, 2005 from 1,210,295 to 2,420,590. All shares and earnings
per share calculations for all periods in this document reflect the effect of
the stock split.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information required by Part III of this Report (Items 10,11,12, 13 and 14) is
incorporated by reference from the registrant’s Proxy Statement to be filed
pursuant to Regulation 14A within 120 days from December 31, 2007.
FORWARD-LOOKING
STATEMENTS
Statements
contained in this Annual Report on Form 10-K (“Annual Report”) of Birner Dental
Management Services, Inc. (the “Company”), which are not historical in nature,
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements
include statements in Item 1., “Business,” Item 1A., “Risk Factors,” Item 5.,
“Market for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities” and Item 7., “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” regarding, for
example, the intent, belief or current expectations of the Company or its
officers with respect to the development or acquisition of additional dental
practices and the successful integration of such practices into the Company’s
network, recruitment of additional dentists, funding of the Company’s expansion,
capital expenditures, payment or nonpayment of dividends and cash outlays for
income taxes.
Investors
and prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties.
Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated
results. These risks and uncertainties include regulatory
constraints, changes in laws or regulations concerning the practice of dentistry
or dental practice management companies, the availability of suitable new
markets and suitable locations within such markets, changes in the Company’s
operating or expansion strategy, failure to consummate or successfully integrate
proposed developments or acquisitions of dental practices, the ability of the
Company to manage effectively an increasing number of dental practices, the
general economy of the United States and the specific markets in which the
Company’s dental practices are located or are proposed to be located, trends in
the health care, dental care and managed care industries, as well as the risk
factors set forth in Item 1A., “Risk Factors,” and other factors as may be
identified from time to time in the Company’s filings with the Securities and
Exchange Commission or in the Company’s press releases.
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2 -
Birner
Dental Management Services, Inc.
Form
10-K
Table of
Contents
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Part
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Item(s)
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Page
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I.
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1.
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Business
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4
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1A.
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Risk
Factors
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11
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2.
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Properties
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17
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3.
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Legal
Proceedings
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20
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4.
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Submission
of Matters to a Vote of Security Holders
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20
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II.
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5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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21
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6.
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Selected
Financial Data
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24
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7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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25
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7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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36
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8.
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Financial
Statements and Supplementary Data
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37
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9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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63
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9A.
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Controls
and Procedures
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63
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9B.
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Other
Information
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63
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III.
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10.
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Directors,
Executive Officers and Corporate Governance
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64
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11.
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Executive
Compensation
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64
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12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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64
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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64
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14.
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Principal
Accounting Fees and Services
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64
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IV.
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15.
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Exhibits,
Financial Statement Schedules
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65
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Signatures
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66
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PART I
ITEM
1. BUSINESS
General
The
Company develops, acquires and provides business services to geographically
dense dental practice networks in select markets, currently including Colorado,
New Mexico and Arizona. With 43 dental practices (“Offices”) in Colorado and
nine Offices in New Mexico, the Company believes, based on industry knowledge
and contacts, that it is the largest provider of dental management services in
Colorado and New Mexico. The Company currently provides business
services to 60 Offices, of which 35 were acquired and 25 were developed
internally (“de novo
Offices”). The Company provides a solution to the needs of dentists,
patients, and third-party payors by allowing the Company’s affiliated dentists
to provide high-quality, efficient dental care in patient-friendly, family
practice settings. Dentists practicing at the various locations provide
comprehensive general dentistry services, and the Company offers specialty
dental services through affiliated specialists.
Dental
Services Industry
According
to the Centers for Medicare and Medicaid Services (“CMS”), dental expenditures
in the U.S. increased from $38.9 billion in 1993 to $91.5 billion in 2006. CMS
also projects that dental expenditures will reach approximately $169.6 billion
by 2017, representing an increase of approximately 85.4% over 2006 dental
expenditures. The Company believes this growth is driven by (i) an increase in
the number of people covered by third-party payment arrangements and the
resulting increase in their utilization of dental services, (ii) an increasing
awareness of the benefits of dental treatments, (iii) the retention of teeth
into later stages of life, (iv) the general aging of the population, as older
patients require more extensive dental services, and (v) a growing awareness of
and demand for preventative and cosmetic services.
Traditionally,
most dental patients have paid for dental services themselves rather than
through third-party payment arrangements such as indemnity insurance, preferred
provider plans or managed dental plans. More recently, factors such as increased
consumer demand for dental services and the desire of employers to provide
enhanced benefits for their employees have resulted in an increase in
third-party payment arrangements for dental services. Current market
trends, including the rise of third-party payment arrangements, have contributed
to the increased consolidation of practices in the dental services industry and
to the formation of dental practice management companies. The Company believes
that the percentage of people covered by third-party payment arrangements will
continue to increase due in part to the popularity of such
arrangements.
Patient
Services
The
Company’s affiliated Offices seek to develop long-term relationships with
patients. Dentists practicing at the Offices provide comprehensive general
dentistry services, including crowns and bridges, fillings (including gold,
porcelain and composite inlays/onlays), and aesthetic procedures such as
porcelain veneers and bleaching. In addition, hygienists provide cleanings and
periodontal services including root planing and scaling. If appropriate, the
patient is offered specialty dental services, such as orthodontics, oral
surgery, pediatrics, endodontics and periodontics, which are available at
certain of the Company’s Offices. Affiliated specialists rotate through certain
Offices to provide these services. By offering a broad range of dental services
within a single practice, the Company is able to distinguish itself from its
competitors and realize operating efficiencies and economies of scale through
higher utilization of its facilities.
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The
Company Dentist Philosophy
The
Company seeks to develop long-term relationships with its dentists by building
the practice at each of its Offices around a managing dentist. The Company’s
dental practice management model provides managing dentists the autonomy and
independence of a private family practice setting without the capital commitment
and without the administrative burdens such as billing/collections, payroll,
accounting, and marketing. This gives the managing dentists the ability to focus
primarily on providing high-quality dental care to their patients. The managing
dentist retains the responsibilities of team building and developing long-term
relationships with patients and staff by building trust and providing a
friendly, relaxed atmosphere in his or her Office. The managing dentist
exercises his or her own clinical judgment in matters of patient care. In
addition, managing dentists have a financial incentive to improve the operating
performance of their Offices through a bonus based upon the operating
performance of the Office.
When the
revenues of an Office justify expansion, associate dentists can be added to the
team. Depending on performance and abilities, an associate dentist may be given
the opportunity to become a managing dentist.
Dental
Practice Management Model
The
Company’s dental practice management model is designed to achieve its goal of
providing personalized, high-quality dental care in a patient friendly setting
similar to that found in a traditional private practice. The Company’s dental
practice management model consists of the following components:
Recruiting of
Dentists. The
Company seeks dentists with excellent skills and experience, who are sensitive
to patient needs, interested in establishing long-term patient relationships and
are motivated by financial incentives to enhance Office operating performance.
The Company believes that practicing in its network of Offices offers dentists
advantages over a solo or smaller group practice, including relief from the
burden of most administrative responsibilities and the resulting ability to
focus more time on practicing dentistry. Advantages to dentists affiliated with
the Company also include relief from capital commitments, a compensation
structure that rewards productivity, employee benefits such as health insurance,
a 401(k) plan, continuing education, paid holidays and vacation, and payment of
professional membership fees and malpractice insurance. The Company
seeks to recruit managing dentists with three or more years of practice
experience. From time to time, the Company will recruit associate dentists
graduating from residency programs.
The
Company advertises for dentists in national and regional dental journals, local
market newspapers, professional conferences and directly at dental schools with
strong residency programs. In addition, the Company’s existing affiliated
dentists provide a good referral source for recruiting future
dentists.
Training of
Non-Dental Employees. The
Company has developed a formalized training program for non-dental employees,
which is conducted by the Company’s staff. This program includes training in
patient interaction, scheduling, use of the computer system, office procedures
and protocols, and third-party payment arrangements. The
Company also offers formalized mandatory training programs for employees
regarding the CFR Title 29 Occupational Safety and Health Act (OSHA), CFR Title
40 Environmental Protection Agency, State dental practice law, State and local
regulations and the Health Insurance Portability and Accountability Act (HIPAA)
to ensure compliance with government regulations. Additionally, the Company
encourages its employees to attend continuing education seminars as a supplement
to the Company’s formalized training program. Company regional
directors meet with senior management and administrative staff to review
pertinent and timely topics and generate ideas that can be shared with all
Offices. Management believes that its training program and ongoing meetings with
employees have contributed to an improvement in the operations of the
Offices.
Staffing
Model. The
Company’s staffing model attempts to maximize profitability in the Offices by
adjusting personnel according to an Office’s revenue level. Staffing at mature
Offices varies based on the number of treatment rooms, but generally includes
one to three dentists, two to four dental assistants, one to three hygienists,
one to three hygiene assistants and two to five front office personnel. Staffing
at de novo Offices
typically consists initially of one dentist, one dental assistant and one front
office person. As the patient base builds at an Office, additional staff is
added to accommodate the growth. The Company currently has a staff of four
regional directors in Colorado, one regional director for New Mexico and one
regional director for Arizona. Regional directors are responsible for between
eight and 14 Offices, overseeing operations, training and development of
non-dental employees, recruitment and implementing the Company’s dental practice
management model.
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Management
Information Systems. The
Company has a networked management information system, through which it receives
uniform data that is analyzed to measure and improve operating performance in
the Offices. The Company’s system enables it to maintain on-line
contact with each of its Offices and allows it to monitor the Office’s
performance with real-time data relating to patient and insurance information,
treatment plans, scheduling, revenues and collections. The Company
provides each Office with monthly operating and financial data, which is
analyzed and used to improve the Office’s performance.
Advertising and
Marketing. The
Company seeks to increase patient volume at its Offices through television,
print advertising and other marketing techniques. The Company’s advertising
efforts are primarily aimed at increasing patient awareness and emphasize the
high-quality care provided, as well as the timely, individualized attention
received from the Company’s affiliated dentists. During 2007 and 2005, the
Company’s television and print advertising emphasized the Denver, Colorado
market. During 2006, the Company’s television and print advertising
emphasized the New Mexico and Colorado Springs, Colorado markets.
Purchasing/Vendor
Relationships. The
Company has negotiated arrangements with a number of its more significant
vendors, including dental laboratory and supply providers, to reduce unit costs.
By aggregating supply purchasing and laboratory usage, the Company believes that
it has received favorable pricing compared to solo or smaller group practices.
The Company’s system of centralized buying and distribution on an as-needed
basis reduces the storage of inventory and supplies at the Offices.
Payor
Mix
The
Company’s payors include indemnity insurers, preferred provider plans, managed
dental care plans, and uninsured cash patients. The Company seeks to
supplement its fee-for-service business with revenue derived from contracts with
capitated managed dental care plans. The Company negotiates the managed care
contracts on behalf of the professional corporations that operate the Offices
(the “P.C.s”), and the P.C.s enter into the contracts with the various managed
care plans.
Capitated
managed dental care plans accounted for 22.3% of the Company’s total dental
group practice revenue in 2007. During the years ended December 31, 2005, 2006,
and 2007, the Company derived the corresponding percentages of total dental
group practice revenue from the following companies’ capitated managed dental
care plans (includes capitation premiums and co-payments): Aetna Healthcare was
responsible for 7.8%, 9.9% and 9.0% respectively, CIGNA Dental Health was
responsible for 7.2%, 7.5% and 9.4% respectively, and Fortis Benefits Insurance
Company was responsible for 4.1%, 4.0% and 3.4% respectively.
Expansion
Program
Since its
formation in May 1995, the Company has acquired 42 practices, including six
practices that have been consolidated with existing Offices and one practice
that was closed during 2004. Of those acquired practices (including the six
practices consolidated with existing Offices and the one practice closed during
2004), 34 were located in Colorado, five were located in New Mexico, and three
were located in Arizona. Although the Company has acquired and integrated
several group practices, many of the Company’s acquisitions have been solo
dental practices. The Company has developed 26 de novo Offices (including
one practice that was consolidated with an existing Office). During
2005, the Company opened two de novo Offices; one in
Phoenix, Arizona and one in Denver, Colorado. During 2006, the Company
opened four de novo
Offices; two in Phoenix, Arizona and one each in the Denver, Colorado and
Albuquerque, New Mexico markets. No new Offices were opened during
2007. In January 2008, the Company signed a lease for a de novo Office that is
expected to open around June 2008.
The
Company expects to increase revenue in existing markets by enhancing the
operating performance of its existing Offices. Enhancing operating performance
will principally be accomplished through the expansion of specialty services and
the aggressive recruitment of additional dentists and hygienists to further
utilize existing physical capacity in the Offices. Additionally, the Company has
remodeled certain Offices to expand the number of treatment rooms in an Office
so that more patients can be treated. Also, the Company has opended 26 de novo Offices and continues
to look for potential future development sites. Furthermore, the Company
evaluates potential acquisition candidates from time to time, and if it finds
one that is suitable for its dental practice management model, it may consummate
such acquisition.
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Affiliation
Model
Relationship
with Professional Corporations (P.C.s)
Each
Office is operated by a P.C., which is owned by one of four different licensed
dentists affiliated with the Company. The Company’s President, Mark A. Birner,
DDS, is one of the four dentists and individually owns 50 P.C.s. The
Company has entered into agreements with the owners of the P.C.s which provide
that upon the death, disability, incompetence or insolvency of the owner, a loss
of the owner’s license to practice dentistry, a termination of the owner’s
employment by the P.C. or the Company, a conviction of the owner for a criminal
offense, or a breach by the P.C. of the Management Agreement (as defined below)
with the Company, the Company may require the owner to sell his or her shares in
the P.C. for a nominal amount to a third-party designated by the
Company. These agreements also prohibit the owner from transferring
or pledging the shares in the P.C.s except to parties approved by the Company
who agree to be bound by the terms of the agreements. Upon a transfer of the
shares to another party, the owner agrees to resign all positions held as an
officer or director of the P.C.
One
licensed dentist who owns a P.C. operating an Office in Colorado has entered
into stock purchase, pledge and security agreements with the Company. Under this
agreement, if certain events occur including the failure to perform the
obligations under the employment agreement with the P.C., cessation of
employment with the P.C. for any reason, death or insolvency or directly or
indirectly causing the P.C. to breach its obligations under the Management
Agreement, then the Company may cause the P.C. to redeem the dentist’s ownership
interest in the P.C. for an agreed price which is not considered to be material
by the Company. Two of the three directors of this P.C. are nominees of the
Company, and the dentist has given the Company’s Chief Executive Officer, Fred
Birner, an irrevocable proxy to vote his shares in the P.C.
Management
Agreements with Affiliated Offices
The
Company derives all of its revenue from its management agreements with the P.C.s
(the “Management Agreements”). Under each of the Management
Agreements, the Company provides business and marketing services at the Offices,
including (i) providing capital, (ii) designing and implementing marketing
programs, (iii) negotiating for the purchase of supplies, (iv) staffing, (v)
recruiting, (vi) training of non-dental personnel, (vii) billing and collecting
patient fees, (viii) arranging for certain legal and accounting services, and
(ix) negotiating with managed care organizations. The P.C. is responsible for,
among other things, (i) supervision of all dentists and dental hygienists, (ii)
ensuring compliance with all laws, rules and regulations relating to dentists
and dental hygienists, and (iii) maintaining proper patient records. The Company
has made, and intends to make in the future, loans to P.C.s in Colorado, New
Mexico and Arizona to fund their acquisition of dental assets from third parties
in order to comply with the laws of such states. Because the Company’s financial
statements are consolidated with the financial statements of the P.C.s, these
loans are eliminated in consolidation.
Under the
typical Management Agreement used by the Company, the P.C. pays the Company a
management fee equal to the Adjusted Gross Center Revenue of the P.C. less
compensation paid to the dentists and dental hygienists employed at the Office
of the P.C. Adjusted Gross Center Revenue is comprised of all fees
and charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company’s costs include all direct and indirect
costs, overhead and expenses relating to the Company’s provision of management
services at the Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of Company employees who work at the Office,
(ii) direct costs of all Company employees or consultants who provide services
to or in connection with the Office, (iii) utilities, janitorial, laboratory,
supplies, advertising and other expenses incurred by the Company in carrying out
its obligations under the Management Agreement, (iv) depreciation expense
associated with the P.C.’s assets and the assets of the Company used at the
Office, and the amortization of intangible asset value relating to the Office,
(v) interest expense on indebtedness incurred by the Company to finance any of
its obligations under the Management Agreement, (vi) general and malpractice
insurance expenses, lease expenses and dentist recruitment expenses, (vii)
personal property and other taxes assessed against the Company’s or the P.C.’s
assets used in connection with the operation of the Office, (viii) out-of-pocket
expenses of the Company’s personnel related to mergers or acquisitions involving
the P.C., (ix) corporate overhead charges or any other expenses of the Company
including the P.C.’s pro rata share of the expenses of the accounting and
computer services provided by the Company, and (x) a collection reserve in the
amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all
costs associated with the provision of dental services at the Office are borne
by the Company, other than the compensation of the dentists and hygienists who
work at the Offices of the P.C.s. This enables the Company to manage the
profitability of the Offices. Each Management Agreement is for a term
of 40 years. Further, each Management Agreement generally may be
terminated by the P.C. only for cause, which includes a material default by or
bankruptcy of the Company. Upon expiration or termination of a Management
Agreement by either party, the P.C. must satisfy all obligations it has to the
Company.
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The
Company plans to continue to use the current form of its Management Agreement to
the extent possible. However, the terms of the Management Agreement are subject
to change to comply with existing or new regulatory requirements or to enable
the Company to compete more effectively.
Employment
Agreements
Dentists
practicing at the Offices have entered into employment agreements or independent
contractor agreements with a P.C. The majority of these agreements
can be terminated by either party without cause with 90 days notice. The
agreements typically contain non-competition provisions for a period of up to
three to five years following their termination within a specified geographic
area, usually a specified number of miles from the associated Office, and
restrict solicitation of patients and employees. Managing dentists
receive compensation based upon a specified amount per hour worked or a
percentage of production attributable to their work, or a bonus based upon the
operating performance of the Office, whichever is greater. Associate dentists
are compensated based upon a specified amount per hour worked or a percentage of
production attributable to their work, whichever is greater. Specialists are
compensated based upon an hourly or monthly guarantee or a percentage of their
own work, whichever is greater.
As of
December 31, 2007, the Company had 81 general dentists, 33 specialists and 63
hygienists who were employed by the P.C.s, and 388 non-dental
employees.
Competition
The
dental services industry is highly fragmented, consisting primarily of solo and
smaller group practices. The dental practice management segment of this industry
is highly competitive and is expected to become more competitive. In this
regard, the Company expects that the provision of multi-specialty dental
services at convenient locations will become increasingly more common. The
Company is aware of several dental practice management companies that are
operating in its markets, including Dental One, Bright Now, American Dental
Partners, Inc. and Dental Health Centers of America. Companies with dental
practice management businesses similar to that of the Company, which currently
operate in other parts of the country, may begin targeting the Company’s
existing markets for expansion. Such competitors may have a greater financial
track record and soundness, superior affiliation models, a better reputation of
existing affiliated practices, more management expertise or otherwise enjoy
competitive advantages, which may make it difficult for the Company to compete
against them.
The
business of providing general and specialty dental services is highly
competitive in the markets in which the Company operates. The Company believes
it competes with other providers of dental and specialty services on the basis
of factors such as brand name recognition, convenience, cost and the quality and
range of services provided. Competition may include practitioners who have more
established practices and reputations. The Company also competes against
established practices in the retention and recruitment of general dentists,
specialists, hygienists and other personnel. If the availability of such
individuals begins to decline in the Company’s markets, it may become more
difficult to attract and retain qualified personnel to sufficiently staff the
existing Offices or to meet the staffing needs of the Company’s planned
expansion.
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Government
Regulation
The
practice of dentistry is regulated at both the state and federal levels, and the
regulation of health care-related companies is increasing. There can be no
assurance that the regulatory environment in which the Company or the P.C.s
operate will not change significantly in the future. The laws and regulations of
all states in which the Company operates impact the Company’s operations but do
not currently materially restrict the Company’s operations in those states. In
addition, state and federal laws regulate health maintenance organizations and
other managed care organizations for which dentists may be providers. In
connection with its operations in existing markets and expansion into new
markets, the Company may become subject to additional laws, regulations and
interpretations or enforcement actions. The laws regulating health care are
broad and subject to varying interpretations, and there is currently a lack of
case law construing such statutes and regulations. The ability of the Company to
operate profitably will depend in part upon the ability of the Company and the
P.C.s to operate in compliance with applicable health care
regulations.
State
Regulation
The laws
of many states, including Colorado and New Mexico, permit a dentist to conduct a
dental practice only as an individual, a member of a partnership or an employee
of a professional corporation, limited liability company or limited liability
partnership. These laws typically prohibit, either by specific provision or as a
matter of general policy, non-dental entities, such as the Company, from
practicing dentistry, from employing dentists and, in certain circumstances,
hygienists or dental assistants, or from otherwise exercising control over the
provision of dental services. Under the Management Agreements, the P.C.s control
all clinical aspects of the practice of dentistry and the provision of dental
services at the Offices, including the exercise of independent professional
judgment regarding the diagnosis or treatment of any dental disease, disorder or
physical condition. Persons to whom dental services are provided at the Offices
are patients of the P.C.s and not of the Company. The Company does
not employ the dentists who provide dental services at the Offices nor does the
Company have or exercise any control or direction over the manner or methods in
which dental services are performed or interfere in any way with the exercise of
professional judgment by the dentists.
Many
states, including Colorado, limit the ability of a person other than a licensed
dentist, to own or control dental equipment or offices used in a dental
practice. Some states allow leasing of equipment and office space to a dental
practice under a bona fide lease, if the equipment and office remain under the
control of the dentist. Some states, including New Mexico, require all
advertisements to be in the name of the dentist. A number of states, including
Arizona, Colorado and New Mexico, also regulate the content of advertisements of
dental services. In addition, Colorado, New Mexico and Arizona, and many other
states impose limits on the tasks that may be delegated by dentists to
hygienists and dental assistants. Some states require entities designated as
“clinics” to be licensed, and may define clinics to include dental practices
that are owned or controlled in whole or in part by non-dentists. These laws and
their interpretations vary from state to state and are enforced by the courts
and by regulatory authorities with broad discretion.
Many
states have fraud and abuse laws which are similar to the federal fraud and
abuse law described below, and which in many cases apply to referrals for items
or services reimbursable by any third-party payor, not just by Medicare and
Medicaid. A number of states, including Arizona, Colorado and New Mexico,
prohibit the submitting of false claims for dental services.
Many
states, including Colorado and New Mexico, also prohibit “fee-splitting” by
dentists with any party except other dentists in the same Professional
Corporation or practice entity. In most cases, these laws have been construed to
apply to the practice of paying a portion of a fee to another person for
referring a patient or otherwise generating business, and not to prohibit
payment of reasonable compensation for facilities and services (other than the
generation of referrals), even if the payment is based on a percentage of the
practice’s revenues.
In
addition, many states have laws prohibiting paying or receiving any
remuneration, direct or indirect, that is intended to include referrals for
health care items or services, including dental items and services.
In
addition, there are certain regulatory risks associated with the Company’s role
in negotiating and administering managed care contracts. The application of
state insurance laws to third party payor arrangements, other than
fee-for-service arrangements, is an unsettled area of law with little guidance
available. As the P.C.s contract with third-party payors, on a capitation or
other basis under which the relevant P.C. assumes financial risk, the P.C.s may
become subject to state insurance laws. Specifically, in some states, regulators
may determine that the Company or the P.C.s are engaged in the business of
insurance, particularly if they contract on a financial-risk basis directly with
self-insured employers or other entities that are not licensed to engage in the
business of insurance. In Arizona, Colorado and New Mexico, the P.C.s currently
only contract on a financial-risk basis with entities that are licensed to
engage in the business of insurance and thus are not subject to the insurance
laws of those states. To the extent that the Company or the P.C.s are determined
to be engaged in the business of insurance, the Company may be required to
change the method of payment from third-party payors and the Company’s revenue
may be materially and adversely affected.
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Federal
Regulation
Federal
laws generally regulate reimbursement, billing and self-referral practices under
Medicare and Medicaid programs. Because the P.C.s currently receive no revenue
under Medicare or Medicaid, the impact of these laws on the Company to date has
been negligible. There can be no assurance, however, that the P.C.s will not
have patients in the future covered by these laws, or that the scope of these
laws will not be expanded in the future, and if expanded, such laws or
interpretations of the laws could have a material adverse effect on the
Company’s business, financial condition and operating results.
Federal
regulations also allow state licensing boards to revoke or restrict a dentist’s
license in the event the dentist defaults in the payment of a
government-guaranteed student loan, and further allow the Medicare program to
offset overdue loan payments against Medicare income due to the defaulting
dentist’s employer. The Company cannot assure compliance by dentists with the
payment terms of their student loans, if any.
Revenues
of the P.C.s or the Company from all insurers, including governmental insurers,
are subject to significant regulation. Some payors limit the extent to which
dentists may assign their revenues from services rendered to beneficiaries.
Under these “reassignment” rules, the Company may not be able to require
dentists to assign their third-party payor revenues unless certain conditions
are met, such as acceptance by dentists of assignment of the payor receivable
from patients, reassignment to the Company of the sole right to collect the
receivables, and written documentation of the assignment. In addition,
governmental payment programs such as Medicare and Medicaid limit reimbursement
for services provided by dental assistants and other ancillary personnel to
those services which were provided “incident to” a dentist’s services. Under
these “incident to” rules, the Company may not be able to receive reimbursement
for services provided by certain members of the Company’s Offices’ staff unless
certain conditions are met, such as requirements that services must be of a type
commonly furnished in a dentist’s office and must be rendered under the
dentist’s direct supervision and that clinical Office staff must be employed by
the dentist or the P.C. The Company does not currently derive a significant
portion of its revenue under such programs.
The
operations of the Offices are also subject to compliance with regulations
promulgated by OSHA relating to such matters as heat sterilization of dental
instruments and the use of barrier techniques such as masks, goggles and gloves.
The Company incurs expenses on an ongoing basis relating to OSHA monitoring and
compliance.
During
2003, health care providers, including the Company, were required to comply with
the electronic data security and privacy requirements of HIPAA. HIPAA
delegates enforcement authority to the Centers for Medicare Services Office for
Civil Rights. Noncompliance with HIPAA regulations can result in
severe penalties up to $250,000 in fines and up to ten years in
prison. As of December 31, 2007, the Company believes that it was in
full compliance with all requirements of HIPPA and there has been no material
impact on the Company due to the implementation of these new
regulations.
Although
the Company believes its operations as currently conducted are in material
compliance with existing applicable laws and regulations, there can be no
assurance that the Company’s contractual arrangements will not be successfully
challenged as violating applicable laws and regulations or that the
enforceability of such arrangements will not be limited as a result of such laws
and regulations. In addition, there can be no assurance that the
business structure under which the Company operates, or the advertising strategy
the Company employs, will not be deemed to constitute the unlicensed practice of
dentistry or the operation of an unlicensed clinic or health care facility. The
Company has not sought judicial or regulatory interpretations with respect to
the manner in which it conducts its business. There can be no assurance that a
review of the business of the Company and the P.C.s by courts or regulatory
authorities will not result in a determination that could materially and
adversely affect their operations or that the regulatory environment will not
change so as to restrict the Company’s existing or future operations. In the
event that any legislative measures, regulatory provisions or rulings or
judicial decisions restrict or prohibit the Company from carrying on its
business or from expanding its operations to certain jurisdictions, structural
and organizational
modifications of the Company’s organization and arrangements may be required
which could have a material adverse effect on the Company, or the Company may be
required to cease operations.
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Insurance
The
Company believes that its existing insurance coverage is adequate to protect it
from the risks associated with the ongoing operation of its
business. This coverage includes property and casualty, general
liability, workers compensation, director’s and officer’s corporate liability,
employment practices liability, excess liability and professional liability
insurance for the Company and for dentists, hygienists and dental assistants at
the Offices.
Trademark
The
Company is the registered owner of the PERFECT TEETH® trademark in the United
States. The Company uses the PERFECT TEETH name to distinguish the Company’s
Offices from other dental offices in the markets in which it operates. Also, the
Company promotes brand awareness and generates demand through marketing and
advertising utilizing the PERFECT TEETH name. The trademark is
effective until 2018 when it will be subject to renewal.
Company
Website
Information
related to the Company’s filings with the Securities and Exchange Commission can
be found on the Company’s website at www.bdms-perfectteeth.com. The
Company’s website is not a part of, or incorporated by reference in, this Annual
Report.
ITEM 1A. Risk
Factors
The
Company’s operations and growth strategy place significant demands on
management.
The
Company’s ability to compete effectively will depend upon its ability to hire,
train, and assimilate additional management and other employees, and its ability
to expand, improve, and effectively utilize its operating, management, marketing
and financial systems to accommodate its expanded operations. Any
failure by the Company’s management to effectively anticipate, implement, and
manage the changes required to sustain the Company’s growth may have a material
adverse effect on the Company’s business, financial condition, and operating
results. See Item 1. “Business – Expansion Program.”
The
success of the Company depends on the continued services of three members of the
Company’s senior management, its Chief Executive Officer, Fred Birner, its
President, Mark Birner, D.D.S., and its Chief Financial Officer, Treasurer and
Secretary, Dennis Genty. The Company believes its future success will depend in
part upon its ability to attract and retain qualified management personnel.
Competition for such personnel is intense and the Company competes for qualified
personnel with numerous other employers, some of which have greater financial
and other resources than the Company. The loss of the services of one or more
members of the Company’s senior management or the failure to add or retain
qualified management personnel could have a material adverse effect on the
Company’s business, financial condition and operating results.
The
Company is heavily dependent upon the recruitment and retention of dentists and
other personnel and its failure to do so may have a material adverse effect on
the Company.
The
Company believes that the profitability and operations of its Offices and its
expansion strategy are dependent on the availability and successful recruitment
and retention of dentists, dental assistants, hygienists, specialists, and other
personnel. The Company may not be able to recruit or retain dentists and other
personnel for its existing and de novo or acquired Offices,
which may have a material adverse effect on the Company’s expansion strategy and
its business, financial condition and operating results. See Item 1. “Business -
Dental Practice Management Model.”
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The
Company is not the owner of the P.C.s and is heavily dependent on its affiliated
dentists and management agreements.
The
Company receives management fees for services provided to the P.C.s under
Management Agreements. The Company owns most of the non-dental operating assets
of the Offices but does not employ or contract with dentists, employ hygienists,
or control the provision of dental care. The Company’s revenue is dependent on
the revenue generated by the P.C.s. Therefore, effective and continued
performance of dentists providing services for the P.C.s is essential to the
Company’s long-term success. Under each Management Agreement, the Company pays
substantially all of the operating and non-operating expenses associated with
the provision of dental services except for the salaries and benefits of the
dentists and hygienists and principal and interest payments of loans made to the
P.C. by the Company. Any material loss of revenue by the P.C.s would have a
material adverse effect on the Company’s business, financial condition, and
operating results, and any termination of a Management Agreement (which is
permitted in the event of a material default or bankruptcy by either party)
could have such an effect. In the event of a breach of a Management Agreement by
a P.C., there can be no assurance that the legal remedies available to the
Company will be adequate to compensate the Company for its damages resulting
from such breach. See Item 1. “Business - Affiliation Model.”
The Company is exposed to uncertainty
and risks associated with de novo Office development.
The
Company utilizes internal and external resources to identify locations in
suitable markets for the development of de novo Offices. Identifying
locations in suitable geographic markets and negotiating leases can be a lengthy
and costly process. Furthermore, the Company will need to provide each de novo Office with the
appropriate equipment, furnishings, materials and supplies. Additionally, de novo Offices must be
staffed with one or more dentists. Because a de novo Office may be staffed
with a dentist with no previous patient base, significant advertising and
marketing expenditures may be required to attract patients. There can be no
assurance that a de
novo Office will become profitable for the Company. See Item
1. “Business - Expansion Program.”
The
Company may need additional capital and there is no guarantee additional
financing would be available.
Implementation
of the Company’s growth strategy has required significant capital resources.
Such resources will be needed to establish additional de novo Offices, maintain or
upgrade the Company’s management information systems, and for the effective
integration, operation and expansion of the Offices. The Company historically
has used principally cash and promissory notes as consideration in acquisitions
of dental practices and intends to continue to do so. If the Company’s capital
requirements over the next several years exceed cash flow generated from
operations and borrowings available under the Company’s existing Credit Facility
or any successor credit facility, the Company may need to issue additional
equity securities and incur additional debt. If additional funds are raised
through the issuance of equity securities, dilution to the Company’s existing
shareholders may result. Additional debt or non-Common Stock equity financings
could be required to the extent that the Common Stock fails to maintain a market
value sufficient to warrant its use for future financing needs. If additional
funds are raised through the incurrence of debt, such debt instruments will
likely contain restrictive financial, maintenance and security covenants. The
Company may not be able to obtain additional required capital on satisfactory
terms, if at all. The failure to raise the funds necessary to finance the
expansion of the Company’s operations or the Company’s other capital
requirements could have a material and adverse effect on the Company’s ability
to pursue its strategy and on its business, financial condition and operating
results. See Item 7. “Managements Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources.”
The
Company’s ability to pay dividends is restricted by several
factors.
The
Company began paying a quarterly cash dividend in 2004, and increased the
quarterly cash dividend in February 2005, January 2006, January 2007 and January
2008. However, the payment of dividends in the future is subject to the
discretion of the Company’s Board of Directors, and various factors may prevent
the Company from paying dividends or may require the Company to reduce the
dividends. Such factors include the Company’s financial position,
capital requirements and liquidity, the existence of a stock repurchase program,
any loan agreement restrictions, state corporate law restrictions, results of
operations and other factors the Company’s Board of Directors may consider
relevant.
The
Company is subject to federal, state, regional, local and other laws and
regulations that could give rise to substantial liabilities or otherwise
adversely affect our cost, manner or feasibility of doing business.
The
practice of dentistry is regulated at both the state and federal levels. There
can be no assurance that the regulatory environment in which the Company or the
P.C.s operate will not change significantly in the future. In addition, state
and federal laws regulate health maintenance organizations and other managed
care organizations for which dentists may be providers. In general, regulation
of health care companies is increasing. In connection with its operations in
existing markets and expansion into new markets, the Company may become subject
to additional laws, regulations and interpretations or enforcement actions. The
laws regulating health care are broad and subject to varying interpretations,
and there is currently a lack of case law construing such statutes and
regulations. The ability of the Company to operate profitably will depend in
part upon the ability of the Company to operate in compliance with applicable
health care regulations.
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The laws
of many states, including Colorado and New Mexico, permit a dentist to conduct a
dental practice only as an individual, a member of a partnership or an employee
of a professional corporation, limited liability company or limited liability
partnership. These laws typically prohibit, either by specific provision or as a
matter of general policy, non-dental entities, such as the Company, from
practicing dentistry, from employing dentists and, in certain circumstances,
hygienists or dental assistants, or from otherwise exercising control over the
provision of dental services.
Many
states, including Colorado, limit the ability of a person other than a licensed
dentist to own or control dental equipment or offices used in a dental practice.
In addition, Arizona, Colorado, New Mexico, and many other states impose limits
on the tasks that may be delegated by dentists to hygienists and dental
assistants. Some states, including Arizona, Colorado and New Mexico, regulate
the content of advertisements of dental services. Some states require entities
designated as “clinics” to be licensed, and may define clinics to include dental
practices that are owned or controlled in whole or in part by non-dentists.
These laws and their interpretations vary from state to state and are enforced
by the courts and by regulatory authorities with broad discretion.
Many
states, including Colorado and New Mexico, also prohibit “fee-splitting” by
dentists with any party except other dentists in the same professional
corporation or practice entity. In most cases, these laws have been construed as
applying to the practice of paying a portion of a fee to another person for
referring a patient or otherwise generating business, and not to prohibit
payment of reasonable compensation for facilities and services (other than the
generation of referrals), even if the payment is based on a percentage of the
practice’s revenues.
Regulatory
uncertainties could adversely affect the Company’s business and
operations.
Many
states have fraud and abuse laws, which apply to referrals for items or services
reimbursable by any third-party payor, not just by Medicare and Medicaid. A
number of states, including Arizona, Colorado and New Mexico, prohibit the
submitting of false claims for dental services.
In
addition, there are certain regulatory risks associated with the Company’s role
in negotiating and administering managed care contracts. The application of
state insurance laws to third party payor arrangements, other than
fee-for-service arrangements, is an unsettled area of law with little guidance
available. Specifically, in some states, regulators may determine that the P.C.s
are engaged in the business of insurance, particularly if they contract on a
financial-risk basis directly with self-insured employers or other entities that
are not licensed to engage in the business of insurance. If the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company’s business, financial condition and operating results may be materially
and adversely affected.
Federal
laws generally regulate reimbursement and billing practices under Medicare and
Medicaid programs. The federal fraud and abuse statute prohibits, among other
things, the payment, offer, solicitation or receipt of any form of remuneration,
directly or indirectly, in cash or in kind to induce or in exchange for (i) the
referral of a person for services reimbursable by Medicare or Medicaid, or (ii)
the purchasing, leasing, ordering or arranging for or recommending the purchase,
lease or order of any item, good, facility or service which is reimbursable
under Medicare or Medicaid. Because the P.C.s receive no revenue under Medicare
and Medicaid, the impact of these laws on the Company to date has been
negligible. There can be no assurance, however, that the P.C.s will not have
patients in the future covered by these laws, or that the scope of these laws
will not be expanded in the future, and if expanded, such laws or
interpretations there under could have a material adverse effect on the
Company’s business, financial condition and operating results.
Since
2003, health care providers, including the Company, have been required to comply
with the electronic data security and privacy requirements of
HIPPA. HIPAA delegates enforcement authority to the Centers for
Medicare Services Office for Civil Rights. Noncompliance with HIPAA
regulations can result in severe penalties up to $250,000 in fines and up to ten
years in prison. As of December 31, 2007, the Company believes that
it was in full compliance with all requirements of HIPPA and there has been no
material impact on the Company due to the implementation of these new
regulations.
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Although
the Company believes that its operations as currently conducted are in material
compliance with applicable laws, there can be no assurance that the Company’s
contractual arrangements will not be successfully challenged as violating
applicable fraud and abuse, self-referral, false claims, fee-splitting,
insurance, facility licensure or certificate-of-need laws or that the
enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company’s existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company’s organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations or change the way it conducts business. See Item 1. “Business -
Government Regulation.”
The
Company’s failure to effectively evaluate and integrate acquisitions may have
negative effects on the Company’s results of operations and financial
condition.
The
Company has completed 42 dental practice acquisitions, six of which have been
consolidated into existing Offices and one of which was closed during 2004. The
success of future acquisitions will depend on several factors, including the
following:
|
·
|
Ability to Identify Suitable
Dental Practices. Identifying appropriate acquisition
candidates and negotiating and consummating acquisitions can be a lengthy
and costly process. Furthermore, the Company may compete for acquisition
opportunities with companies that have greater resources than the Company.
There can be no assurance that suitable acquisition candidates will be
identified or that acquisitions will be consummated on terms favorable to
the Company, on a timely basis or at all. If a planned acquisition fails
to occur or is delayed, the Company’s quarterly financial results may be
materially lower than expectations, resulting in a decline, perhaps
substantial, in the market price of its Common Stock. In addition,
increasing consolidation in the dental management services industry may
result in an increase in purchase prices required to be paid by the
Company to acquire dental
practices.
|
|
·
|
Integration of Dental
Practices. The integration of acquired dental practices into the
Company’s networks is a difficult, costly and time consuming process
which, among other things, requires the Company to attract and retain
competent and experienced management and administrative personnel and to
implement and integrate reporting and tracking systems, management
information systems and other operating systems. In addition, such
integration may require the expansion of accounting controls and
procedures and the evaluation of certain personnel functions. There can be
no assurance that substantial unanticipated problems, costs or delays
associated with such integration efforts or with such acquired practices
will not occur. There also can be no assurance that the Company will be
able to successfully integrate acquired practices in a timely manner or at all, or that
any acquired practices will have a positive impact on the Company’s
results of operations and financial
condition.
|
The
health care industry’s cost-containment initiatives may lead to less than
historical per patient profit margins.
The
health care industry, including the dental services market, is experiencing a
trend toward cost containment, as payors seek to impose lower reimbursement
rates upon providers. The Company believes that this trend will continue and
will increasingly affect the provision of dental services. This may result in a
reduction in per-patient and per-procedure revenue from historic levels.
Significant reductions in payments to dentists or other changes in reimbursement
by payors for dental services may have a material adverse effect on the
Company’s business, financial condition and operating results.
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A
portion of the Company’s net revenue is derived from capitated payment
arrangements, which have terms that may adversely affect the Company’s results
of operations and financial condition.
In 2007,
the Company derived approximately 12.2% of its total group practice revenue
(“Revenue”) from capitated managed dental care contracts, and 10.1% of its
Revenue from associated co-payments. Under a capitated managed dental
care contract, the dental practice provides dental services to the members of
the plan and receives a fixed
monthly
capitation payment for each plan member covered for a specific schedule of
services regardless of the quantity or cost of services to the participating
dental practice which is obligated to provide them, and may receive a co-pay for
each service provided. This arrangement shifts the risk of utilization of such
services to the dental group practice that provides the dental services. Because
the Company assumes responsibility under its Management Agreements for all
aspects of the operation of the dental practices other than the practice of
dentistry and thus bears all costs of the provision of dental services at the
Offices other than compensation and benefits of dentists and hygienists, the
risk of over-utilization of dental services at the Offices under capitated
managed dental care plans is effectively shifted to the Company. In contrast,
under traditional indemnity insurance arrangements, the insurance company
reimburses reasonable charges that are billed for the dental services
provided.
Risks
associated with capitated managed dental care contracts include principally (i)
the risk that the capitation payments and any associated co-payments do not
adequately cover the costs of providing the dental services, (ii) the risk that
one or more of the P.C.s may be terminated as an approved provider by managed
dental care plans with which they contract, (iii) the risk that the Company will
be unable to negotiate future capitation arrangements on satisfactory terms with
managed care dental plans, and (iv) the risk that large subscriber groups will
terminate their relationship with such managed dental care plans which would
reduce patient volume and capitation and co-payment revenue. There can be no
assurance that the Company will be able to negotiate future capitation
arrangements on behalf of P.C.s on satisfactory terms or at all, or that the
fees offered in current capitation arrangements will not be reduced to levels
unsatisfactory to the Company. Moreover, to the extent that costs incurred by
the Company’s affiliated dental practices in providing services to patients
covered by capitated managed dental care contracts exceed the revenue under such
contracts, the Company’s business, financial condition and operating results may
be materially and adversely affected. See Item 1. “Business - Payor
Mix.”
If
federal or state regulations change to require licensure the Company’s business
model may be adversely affected.
Federal
and state laws regulate insurance companies and certain other managed care
organizations. Many states, including Colorado, also regulate the establishment
and operation of networks of health care providers. In most states, these laws
do not apply to discounted-fee-for-service arrangements. These laws also do not
generally apply to networks that are paid on a capitated basis, unless the
entity with which the network provider is contracting is not a licensed health
insurer or other managed care organization. There are exceptions to these rules
in some states. For example, certain states require a license for a capitated
arrangement with any party unless the risk-bearing entity is a professional
corporation that employs the professionals. The Company believes its current
activities do not constitute the provision of insurance in Colorado or New
Mexico, and thus, it is in compliance with the insurance laws of these states
with respect to the operation of its Offices. There can be no assurance that
these laws will not be changed or that interpretations of these laws by the
regulatory authorities in those states, or in the states in which the Company
expands, will not require licensure or a restructuring of some or all of the
Company’s operations. In the event that the Company is required to become
licensed under these laws, the licensure process can be lengthy and time
consuming and, unless the regulatory authority permits the Company to continue
to operate while the licensure process is progressing, the Company could
experience a material adverse change in its business while the licensure process
is pending. In addition, many of the licensing requirements mandate strict
financial and other requirements, which the Company may not immediately be able
to meet. Further, once licensed, the Company would be subject to continuing
oversight by and reporting to the respective regulatory agency. The regulatory
framework of certain jurisdictions may limit the Company’s expansion into, or
ability to continue operations within, such jurisdictions if the Company is
unable to modify its operational structure to conform to such regulatory
framework. Any limitation on the Company’s ability to expand could have a
material adverse effect on the Company’s business, financial condition and
operating results.
The Company may see increased costs
or lower Revenue arising from health care reform.
Federal
and state governments currently are considering various types of health care
initiatives and comprehensive revisions to the health care and health insurance
systems. Some of the proposals under consideration, or others that may be
introduced, could, if adopted, have a material adverse effect on the Company’s
business, financial condition and operating results. It is uncertain what
legislative programs, if any will be adopted in the future, or what action
Congress or state legislatures may take regarding health care reform proposals
or legislation. In addition, changes in the health care industry, such as the
growth of managed care organizations and provider networks, may result in lower
payments for the services of the Company’s managed practices.
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The
substantial value of its intangible assets may impair the Company’s
results of operations and financial condition.
At
December 31, 2007, intangible assets on the Company’s consolidated balance sheet
were $11.4 million, representing 54.5% of the Company’s total assets at that
date. If the Company completes additional acquisitions, the Company expects the
amount allocable to intangible assets on its balance sheet will increase, which
will increase the Company’s amortization expense. In the event of any sale or
liquidation of the Company or a portion of its assets, the value of the
Company’s intangible assets may not be realized. In addition, the Company
evaluates whether events and circumstances have occurred indicating that any
portion of the remaining balance of the amount allocable to the Company’s
intangible assets may not be recoverable. When factors indicate that the amount
allocable to the Company’s intangible assets should be evaluated for possible
impairment, the Company may be required to reduce the carrying value of such
assets. Any future determination requiring the write off of a significant
portion of unamortized intangible assets could have a material adverse effect on
the Company’s financial condition and operating results.
Professional liability
may produce unforeseen expenses and lower operating results.
In recent
years, dentists have become subject to an increasing number of lawsuits alleging
malpractice. Some of these lawsuits involve large claims and
significant defense costs. Any suits involving the Company or dentists at the
Offices, if successful, could result in substantial damage awards that may
exceed the limits of the Company’s insurance coverage. The Company provides
practice management services; it does not engage in the practice of dentistry or
control the practice of dentistry by the dentists or their compliance with
regulatory requirements directly applicable to providers. There can be no
assurance, however, that the Company will not become subject to litigation in
the future as a result of the dental services provided at the Offices. The
Company maintains professional liability insurance for itself and provides for
professional liability insurance covering dentists, hygienists and dental
assistants at the Offices. While the Company believes it has adequate liability
insurance coverage, there can be no assurance that the coverage will be adequate
to cover losses or that coverage will continue to be available upon terms
satisfactory to the Company. In addition, certain types of risks and
liabilities, including penalties and fines imposed by governmental agencies, are
not covered by insurance. Malpractice insurance, moreover, can be expensive and
varies from state to state. Successful malpractice claims could have a material
adverse effect on the Company’s business, financial condition and operating
results. See Item 1. “Business - Insurance.”
Non-competition
covenants and other arrangements with the Company’s affiliated dentists may not
be enforceable.
The
Management Agreements require the P.C.s to enter into employment agreements with
dentists which include non-competition provisions typically for three to five
years after termination of employment within a specified geographic area,
usually a specified number of miles from the relevant Office, and restrict
solicitation of employees and patients. In Colorado, covenants not to compete
are prohibited by statute with certain exceptions. Permitted
covenants not to compete are enforceable in Colorado only to the extent their
terms are reasonable in both duration and geographic scope. Arizona and New
Mexico courts have enforced covenants not to compete if their terms are found to
be reasonable. It is thus uncertain whether a court will enforce a covenant not
to compete in those states in a given situation. In addition, there is little
judicial authority regarding whether a practice management agreement will be
viewed as the type of protectable business interest that would permit it to
enforce such a covenant or to require a P.C. to enforce such covenants against
dentists formerly employed by the P.C. Since the intangible value of a
Management Agreement depends primarily on the ability of the P.C. to preserve
its business, which could be harmed if employed dentists went into competition
with the P.C., a determination that the covenants not to compete contained in
the employment agreements between the P.C. and its employed dentists are
unenforceable could have a material adverse impact on the Company. See Item 1.
“Business - Affiliation Model- Employment Agreements.” In addition,
the Company is a party to various agreements with managing dentists who own the
P.C.s, which restrict the dentists’ ability to transfer the shares in the P.C.s.
See Item 1. “Business - Affiliation Model - Relationship with P.C.s.” There can
be no assurance that these agreements will be enforceable in a given situation.
A determination that these agreements are not enforceable could have a material
adverse impact on the Company.
-
16 -
Seasonality
could affect Revenue during the latter part of the fiscal
year.
The
Company’s past financial results have fluctuated somewhat due to seasonal
variations in the dental service industry, with Revenue typically declining in
the fourth calendar quarter. The Company expects this seasonal
fluctuation to continue in the future.
The Company
operates in a competitive market, which may reduce gross profit margins and
market share.
The
dental practice management segment of the dental services industry is highly
competitive and is expected to become increasingly more competitive. Several
dental practice management companies operate in the Company’s markets. A number
of companies with dental practice management businesses similar to that of the
Company currently operate in other parts of the country and may enter the
Company’s existing markets in the future. As the Company seeks to expand its
operations into new markets, it is likely to face competition from dental
practice management companies, which already have established a strong business
presence in such locations. The Company’s competitors may have a greater
financial track record and soundness, superior affiliation models, a better
reputation of existing affiliated practices, more management expertise or
otherwise enjoy competitive advantages, which may make it difficult for the
Company to compete against them or to acquire additional Offices on terms
acceptable to the Company. See Item 1. “Business - Competition.”
The
business of providing general dental and specialty dental services is highly
competitive in the markets in which the Company operates. Competition for
providing dental services may include practitioners who have more established
practices and reputations. The Company competes against established practices in
the retention and recruitment of general dentists, specialists, hygienists and
other personnel. If the availability of such dentists, specialists, hygienists
and other personnel begins to decline in the Company’s markets, it may become
more difficult to attract qualified dentists, specialists, hygienists and other
personnel. There is no assurance that the Company will be able to compete
effectively against other existing practices or against new single or
multi-specialty dental practices that enter its markets, or to compete against
such practices in the recruitment and retention of qualified dentists,
specialists, hygienists and other personnel. See Item 1. “Business -
Competition.”
Various factors
outside of the Company’s control may affect the Company’s stock
price.
The
market price of the Common Stock could be subject to wide fluctuations in
response to quarterly variations in operating results of the Company or its
competitors, changes in earnings estimates by analysts, developments in the
industry or changes in general economic conditions.
NASDAQ
has stock market listing standards for share prices and market capitalization
and failure to comply with the standards may result in the Company being
de-listed from the exchange.
Due to
its size, the Company’s stock is thinly-held and trades with low volume. If the
Company is unable to maintain NASDAQ listing standards, the Company may be
forced to de-list with NASDAQ.
ITEM
2. Properties
Offices
and Facilities
The
Company’s corporate headquarters are located at 3801 E. Florida Avenue, Suite
508, Denver, Colorado, in approximately 9,500 square feet occupied under a lease
that expires October 31, 2010. The Company believes that this space
is adequate for its current needs. The Company also leases real estate at the
location of each Office under leases ranging in term from one to five years with
options to renew the leases for specific periods subsequent to their original
terms. The Company believes the facilities at each of its Offices are adequate
for their current level of business. The Company generally
anticipates leasing and developing de novo Offices in its
current markets rather than significantly expanding the size of its existing
Offices.
The
Offices typically are located either in shopping centers, professional office
buildings or stand-alone buildings. The majority of the de novo Offices are located
in supermarket-anchored shopping centers. The Offices have from four to 19
treatment rooms and range in size from 1,200 square feet to 7,300 square
feet.
-
17 -
Location
of Offices
-
18 -
Existing Offices
As of the
date of this Annual Report, the Company managed a total of 60 Offices in
Colorado, New Mexico, and Arizona. The following table identifies each Office,
the location of each Office, the date each Office was acquired or de novo developed, and any
specialty dental services offered at that Office in addition to comprehensive
general dental services:
|
Office Name
|
Office Address
|
Date
Acquired/
Developed*
|
Specialty
Services
|
|
Colorado
|
|||
|
Boulder
|
|||
|
Perfect
Teeth/Boulder
|
4155
Darley, #F
|
September
1997
|
|
|
Perfect
Teeth/Folsom
|
1840
Folsom, Suite 201
|
April
1998
|
1,4
|
|
Brighton
|
|||
|
Perfect
Teeth/Brighton
|
530
East Bromley Lane, #100
|
November
2004*
|
|
|
Castle Rock
|
|||
|
Perfect
Teeth/Castle Rock
|
390
South Wilcox, Unit D
|
October
1995
|
|
|
Colorado Springs
|
|||
|
Perfect
Teeth/Cheyenne Meadows
|
827
Cheyenne Meadows Road
|
June
1998*
|
|
|
Perfect
Teeth/Garden of the Gods
|
4329
Centennial Boulevard
|
July
1996*
|
|
|
Perfect
Teeth/South 8th Street
|
1050
South Eighth Street
|
August
1998
|
1,2,3,4,5
|
|
Perfect
Teeth/Uintah Gardens
|
1768
West Uintah Street
|
May
1996*
|
|
|
Perfect
Teeth/Union & Academy
|
5050
North Academy
|
September
1997
|
1,2,3,4,5
|
|
Perfect
Teeth/Woodman Valley
|
6914
North Academy Boulevard, Unit 1B
|
April
1998*
|
|
|
Perfect
Teeth/Powers
|
5929
Constitution Avenue
|
March
1999*
|
1
|
|
Denver
|
|||
|
Perfect
Teeth/64th and Ward
|
12650
West 64th Avenue, Unit J
|
January
1996*
|
|
|
Perfect
Teeth/88th and Wadsworth
|
8749
Wadsworth Boulevard
|
September
1997
|
1,2,4,5
|
|
Perfect
Teeth/Arapahoe
|
7600
East Arapahoe Road, #311
|
October
1995
|
1
|
|
Perfect
Teeth/Bowmar
|
5151
South Federal Boulevard, #G-2
|
October
1995
|
|
|
Perfect
Teeth/Buckley and Quincy
|
4321
South Buckley Road
|
September
1997
|
1
|
|
Perfect
Teeth/Central Denver
|
1633
Fillmore Street, Suite 200
|
May
1996
|
|
|
Perfect
Teeth/East 104th Avenue
|
2200
East 104th Avenue, #112
|
May
1996
|
1
|
|
Perfect
Teeth/East Cornell
|
12200
East Cornell Avenue, # E
|
August
1996
|
2,5
|
|
Perfect
Teeth/East Iliff
|
16723
East Iliff Avenue
|
May
1997
|
|
|
Glendale Dental
Group
|
4521
East Virginia Avenue
|
February
1999
|
|
|
Perfect
Teeth/Golden
|
17211
South Golden Road, #100
|
June
1999*
|
|
|
Perfect
Teeth/Green Mountain
|
13035
West Alameda Parkway
|
December
1998*
|
|
|
Perfect
Teeth/Green Valley Ranch
|
18607
E. 48th
Ave, Unit 104
|
June
2006*
|
|
|
Perfect
Teeth/Highlands Ranch
|
9227
Lincoln Avenue, Suite 100
|
July
1999*
|
1
|
|
Perfect
Teeth/Ken Caryl
|
7660
South Pierce
|
September
1997
|
|
|
Perfect
Teeth/Leetsdale
|
7150
Leetsdale Drive, #110A
|
March
1996*
|
|
|
Mississippi
Dental Group
|
11175
East Mississippi Avenue, #110
|
September
1998
|
|
|
Perfect
Teeth/Monaco and Evans
|
2223
S. Monaco, Suite F
|
November
1995
|
1,3,4
|
|
Perfect
Teeth/North Sheridan
|
11550
North Sheridan, #101
|
May
1996
|
|
|
Perfect
Teeth/Parker
|
11005
South Parker Road
|
December
1998*
|
1
|
|
Perfect
Teeth/Sheridan and 64th Avenue
|
5169
West 64th Avenue
|
May
1996
|
|
|
Perfect
Teeth/Smoky Hill
|
20269
E. Smoky Hill Rd., Unit H
|
January
2005*
|
|
|
Perfect
Teeth/South Holly Street
|
8211
South Holly Street
|
September
1997
|
5
|
|
Perfect
Teeth/Speer
|
700
East Speer Boulevard
|
February
1997
|
|
|
Perfect
Teeth/West 38th Avenue
|
7760
West 38th Avenue, #200
|
May
1996
|
|
|
Perfect
Teeth/West 120th Avenue
|
6650
West 120th Avenue, A-6
|
September
1997
|
3
|
|
Perfect
Teeth/West Jewell
|
8064
West Jewell
|
April
1998
|
|
|
Perfect
Teeth/Yale
|
7515
West Yale Avenue, Suite A
|
April
1997
|
1,2,3,4,5
|
|
Fort Collins
|
|||
|
Perfect
Teeth/South Fort Collins
|
1355
Riverside Avenue, Unit D
|
May
1996
|
|
|
Greeley
|
|||
|
Perfect
Teeth/Greeley
|
902
14th Street
|
September
1997
|
|
|
Longmont
|
|||
|
Perfect
Teeth/Longmont
|
641
Ken Pratt Boulevard
|
September
1997
|
|
|
Loveland
|
|||
|
Perfect
Teeth/ Loveland
|
3400
West Eisenhower Boulevard
|
September
1996
|
3,4
|
-
19 -
|
Office Name
|
Office Address
|
Date
Acquired/
Developed*
|
Specialty Services
|
|
New
Mexico
|
|||
|
Albuquerque
|
|||
|
Perfect
Teeth/Alice
|
5909
Alice NE
|
February
1998
|
|
|
Perfect
Teeth/Candelaria
|
6101
Candelaria NE
|
April
1997
|
|
|
Perfect
Teeth/Cottonwood
|
10250
Cottonwood Park NW, Suite 100
|
August
2006*
|
1,3,4,5
|
|
Perfect
Teeth/Cubero Drive
|
5900
Cubero Drive NE, Suite E
|
September
1998
|
|
|
Perfect
Teeth/Four Hills
|
13140-E
Central Avenue, SE
|
August
1997*
|
|
|
Perfect
Teeth/Fourth Street
|
5721
Fourth Street NW
|
August
1997
|
|
|
Perfect
Teeth/Wyoming and Candelaria
|
8501
Candelaria NE, Suite D3
|
August
1997
|
1,3,4,5
|
|
Rio
Rancho
|
|||
|
Perfect
Teeth/Rio Rancho
|
4500
Arrowhead Ridge Drive
|
July
1999*
|
|
|
Santa
Fe
|
|||
|
Perfect
Teeth/Plaza Del Sol
|
720
St. Michael Drive, Suite O
|
May
1998*
|
1,3,5
|
|
Arizona
|
|||
|
Goodyear
|
|||
|
Perfect
Teeth/Palm Valley
|
14175
West Indian School Bypass Road, #B6
|
March
2000*
|
|
|
Gilbert
|
|||
|
Perfect
Teeth/Gilbert
|
81
West Guadalupe Road, Suite 101
|
March
2006*
|
2,3,5
|
|
Mesa
|
|||
|
Perfect
Teeth/Power & McDowell
|
2733
North Power Road, Suite 101
|
October
2000*
|
|
|
Perfect
Teeth/Guadalupe
|
8257
E. Guadalupe Road, Suite 121
|
August
2006*
|
|
|
Peoria
|
|||
|
Perfect
Teeth/Olive
|
10613
West Olive Avenue, Suite 201
|
September
2004*
|
1,2,3,4,5
|
|
Scottsdale
|
|||
|
Perfect
Teeth/Bell Road & 64th
Street
|
6345
East Bell Road, Suite 1
|
July
1998
|
2,3,5
|
|
Surprise
|
|||
|
Perfect
Teeth/Waddell
|
13856
W. Waddell Rd, Ste 102
|
October
2005*
|
4
|
|
Tempe
|
|||
|
Perfect
Teeth/Elliot and McClintock
|
7650
S. McClintock Dr., #110
|
June
1999*
|
|
______________
|
(1)
|
Orthodontics
|
|
(2)
|
Periodontics
|
|
(3)
|
Oral
Surgery
|
|
(4)
|
Pediatrics
|
|
(5)
|
Endodontics
|
*
Indicates de novo
Office opening date. Dates without * indicates acquired Office.
ITEM
3. LEGAL PROCEEDINGS.
From time
to time the Company is subject to litigation incidental to its
business. Such claims, if successful, could result in damage awards
exceeding, perhaps substantially, applicable insurance coverage. The
Company is not presently a party to any material litigation.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
None.
-
20 -
PART II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Price
Range of Common Stock
The
Common Stock is quoted on the Nasdaq Capital Market under the symbol
“BDMS”. The following table sets forth, for the period indicated, the
range of high and low sales prices per share of Common Stock, as reported on The
Nasdaq Capital Market.
|
HIGH
|
LOW
|
||||
|
2006
|
|||||
|
First
Quarter
|
$21.07
|
$17.00
|
|||
|
Second
Quarter
|
17.50
|
14.96
|
|||
|
Third
Quarter
|
22.00
|
14.72
|
|||
|
Fourth
Quarter
|
21.00
|
17.14
|
|||
|
2007
|
|||||
|
First
Quarter
|
$27.00
|
$18.77
|
|||
|
Second
Quarter
|
25.24
|
21.35
|
|||
|
Third
Quarter
|
23.21
|
19.00
|
|||
|
Fourth
Quarter
|
22.55
|
18.66
|
|||
At March
24, 2008, the last reported sale price of the Company’s Common Stock was $20.50
per share. As of the same date, there were 2,108,805 shares
of Common Stock outstanding held by approximately 204 holders of
record and approximately 336 beneficial owners.
Dividend
Policy
Since
March 9, 2004, the Company has declared the following increasing quarterly cash
dividends.
|
Divdend
Declaration Date
|
Quarterly
Dividend Declared per Share
|
||
|
March
9, 2004
|
0.0375
|
||
|
February
10, 2005
|
0.10
|
||
|
January
10, 2006
|
0.13
|
||
|
January
19, 2007
|
0.15
|
||
|
January
17, 2008
|
0.17
|
The
payment of dividends in the future is subject to the discretion of the Company’s
Board of Directors, and various factors may prevent the Company from paying
dividends or require the Company to reduce the dividends. Such factors include
the Company’s financial position, capital requirements and liquidity, the
existence of a stock repurchase program, any loan agreement restrictions, state
corporate law restrictions, results of operations and such other factors the
Company’s Board of Directors may consider relevant.
-
21 -
Purchases
of Equity Securities by the Issuer
The
following chart provides information regarding Common Stock repurchases by the
Company during the period October 1, 2007 through December 31,
2007.
|
Issuer Purchases of Equity
Securities
|
||||||||||||||||
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs
|
||||||||||||
|
October
1, 2007 through October 31, 2007
|
- | $ | - | - | $ | 474,002 | ||||||||||
|
November
1, 2007 through November 30, 2007
|
- | $ | - | - | $ | 474,002 | ||||||||||
|
December
1, 2007 through December 31, 2007
|
63,377 | $ | 21.03 | 14,173 | $ | 174,324 | ||||||||||
|
Total
|
63,377 | $ | 21.03 | 14,173 | ||||||||||||
There are
no expiration dates on any of the plans. Common Stock repurchases may be made
from time to time as the Company’s management deems appropriate. On
December 12, 2007, the Company purchased, in a private transaction approved by
the Board of Directors and outside of previously announced repurchase plans,
49,204 shares of its Common Stock at a price of $21.00 per share.
On
October 5, 2006, the Company accepted for payment, at a purchase price of $21.75
per share, 212,396 shares of its Common Stock that were properly tendered and
not withdrawn pursuant to the Company’s “dutch auction” tender offer (“Tender
Offer”). The 212,396 shares purchased were comprised of the 175,000 shares the
Company offered to purchase and 37,396 shares that were purchased pursuant to
the Company's right to purchase up to an additional 2% of the outstanding shares
as of August 31, 2006, without extending the Tender Offer in accordance with
applicable securities laws. These shares represented approximately 9.2% of the
shares outstanding as of September 30, 2006. The Tender Offer was funded from a
$4.6 million term loan (“Term Loan”). Under the Term Loan, $2.3 million was
borrowed at a fixed interest rate of 7.05% and the remaining $2.3 million was
borrowed at a floating interest rate of Libor plus 1.5%. As of December 31,
2007, the rate was 6.65%. The principal amount borrowed is being paid quarterly
in 20 equal payments of $230,000 plus interest beginning December 31, 2006. The
term loan matures on September 30, 2011.
-
22 -
Performance
Graph*
The
following line graph compares the percentage change from December 31, 2002
through December 31, 2007 for (i) the Common Stock, (ii) the Nasdaq Composite
Index, (iii) the S&P Healthcare Sector, (iv) the S&P 500 Composite Index
and (v) American Dental Partners. Historical stock price performance is not
necessarily indicative of future stock price performance.
Comparison
of 5-Year Cumulative Total Return **
Assumes
Initial Investment of $100
|
Description
|
12/31/2002
|
12/31/2003
|
12/31/2004
|
12/31/05
|
12/31/06
|
12/31/07
|
||||||||||||||||||
|
BIRNER
DENTAL
|
$ | 100.00 | $ | 134.55 | $ | 203.78 | $ | 428.89 | $ | 415.07 | $ | 480.28 | ||||||||||||
|
NASDAQ
Composite -
|
||||||||||||||||||||||||
|
Total
Returns
|
100.00 | 150.79 | 164.60 | 168.08 | 185.55 | 211.29 | ||||||||||||||||||
|
S&P
- Healthcare
|
100.00 | 115.05 | 116.98 | 124.54 | 133.90 | 143.69 | ||||||||||||||||||
|
S&P
500 Index -
|
||||||||||||||||||||||||
|
Total
Returns
|
100.00 | 128.68 | 142.67 | 149.65 | 173.28 | 182.81 | ||||||||||||||||||
|
American
Dental Partners
|
100.00 | 127.93 | 213.69 | 305.66 | 319.37 | 169.57 | ||||||||||||||||||
*This
Section is not “soliciting material,” is not deemed “filed” with the Securities
and Exchange Commission and is not to be incorporated by reference in any filing
of the Company under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, whether made before or after the date hereof
and irrespective of any general incorporation language in any such
filing.
**Total
return based on $100 initial investment and reinvestment of
dividends.
-
23 -
ITEM
6. SELECTED FINANCIAL DATA.
The
following table sets forth selected consolidated financial and operating data
for the Company. The data for the years ended December 31, 2005, 2006
and 2007 should be read in conjunction with the Company’s consolidated financial
statements included elsewhere in this document. The selected
consolidated financial data for the 2003 and 2004 periods are derived from the
Company’s historical consolidated financial statements.
A 2-for-1
split of the Company’s common stock became effective as of August 1,
2005. All earnings per share data in the following table reflect the
stock split.
The data
in the following table is in thousands except per share data, number of Offices
and number of dentists:
|
Years
Ended December 31,
|
||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||||
|
Statements
of Income Data: (1)
|
||||||||||||||||||||
|
Net
revenue
|
$ | 30,539 | $ | 32,170 | $ | 36,716 | $ | 39,387 | $ | 40,790 | ||||||||||
|
Direct
expenses
|
25,032 | 26,249 | 28,944 | 30,934 | 32,107 | |||||||||||||||
|
Contribution
from dental offices
|
5,507 | 5,921 | 7,772 | 8,453 | 8,684 | |||||||||||||||
|
Corporate
expenses
|
3,292 | 3,272 | 4,375 | 4,306 | 4,229 | |||||||||||||||
|
Operating
income
|
2,215 | 2,649 | 3,397 | 4,147 | 4,454 | |||||||||||||||
|
Income
from continuing operations before income taxes
|
2,061 | 2,590 | 3,409 | 3,920 | 4,089 | |||||||||||||||
|
Income
tax expense
|
806 | 1,023 | 1,245 | 1,597 | 1,652 | |||||||||||||||
|
Income
from continuing operations
|
1,255 | 1,567 | 2,164 | 2,323 | 2,437 | |||||||||||||||
|
Operating
loss attributable to assets disposed of
|
116 | 120 | - | - | - | |||||||||||||||
|
Loss
recognized on dispositions
|
- | 192 | - | - | - | |||||||||||||||
|
Income
tax benefit
|
45 | 125 | - | - | - | |||||||||||||||
|
Loss
on discontinued operations
|
71 | 187 | - | - | - | |||||||||||||||
|
Net
income
|
1,184 | 1,380 | 2,164 | 2,323 | 2,437 | |||||||||||||||
|
Basic earnings per share of
Common Stock: (2)
|
||||||||||||||||||||
|
Net
income – continuing operations
|
0.48 | 0.65 | 0.91 | 1.02 | 1.16 | |||||||||||||||
|
Net
income (loss) – discontinued operations
|
(0.03 | ) | (0.08 | ) | - | - | - | |||||||||||||
|
Net
income per share of Common Stock
|
0.45 | 0.57 | 0.91 | 1.02 | 1.16 | |||||||||||||||
|
Diluted earnings per share of
Common Stock: (2)
|
||||||||||||||||||||
|
Net
income – continuing operations
|
0.44 | 0.60 | 0.82 | 0.94 | 1.08 | |||||||||||||||
|
Net
loss – discontinued operations
|
0.02 | 0.07 | - | - | - | |||||||||||||||
|
Net
income per share of Common Stock
|
0.42 | 0.53 | 0.82 | 0.94 | 1.08 | |||||||||||||||
|
Balance
Sheet Data: (3)
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 1,111 | $ | 756 | $ | 922 | $ | 888 | $ | 964 | ||||||||||
|
Working
capital (deficit)
|
(109 | ) | (56 | ) | (96 | ) | (936 | ) | (858 | ) | ||||||||||
|
Total
assets
|
22,210 | 21,860 | 22,033 | 22,822 | 20,897 | |||||||||||||||
|
Long-term
debt, less current maturities
|
2,736 | 1,079 | 2,887 | 6,502 | 4,785 | |||||||||||||||
|
Total
shareholders’ equity
|
14,411 | 15,128 | 13,201 | 9,548 | 9,531 | |||||||||||||||
|
Dividends
declared per share of Common Stock
|
$ | - | $ | 0.15 | $ | 0.40 | $ | 0.52 | $ | 0.60 | ||||||||||
|
Operating
Data:
|
||||||||||||||||||||
|
Number
of Offices (3)
|
54 | 55 | 57 | 60 | 60 | |||||||||||||||
|
Number
of dentists (3)(4)
|
95 | 102 | 107 | 114 | 114 | |||||||||||||||
|
Total
net revenue per Office
|
$ | 566 | $ | 585 | $ | 644 | $ | 656 | $ | 680 | ||||||||||
___________________
|
(1)
|
Acquisitions
of Offices and development of de novo Offices affect
the comparability of the data. In 2004, the Company closed one existing
Office and opened two de
novo Offices. In 2005, the Company opened two de novo Offices. In
2006, the Company consolidated two offices into one and opened four de novo
Offices.
|
|
(2)
|
Computed
on the basis described in Note 2 of Notes to Consolidated Financial
Statements of the Company.
|
|
(3)
|
Data
is as of the end of the respective periods
presented.
|
|
(4)
|
This
represents the actual number of dentists employed by the P.C.s and
specialists who contract with the P.C.s to provide specialty dental
services.
|
-
24 -
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
The
following discussion and analysis relates to factors that have affected the
consolidated results of operations and financial condition of the Company for
the three years ended December 31, 2007. Reference is made to the
Company’s consolidated financial statements and related notes thereto and the
Selected Financial Data included elsewhere in this Annual Report. This
discussion and analysis contains forward-looking statements. Discussions
containing such forward-looking statements may be found in the material set
forth below and under Item 1. “Business,” Item 5., “Market for the Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities” as well as in this Annual Report generally. Investors and
prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation the risk factors set forth in Item 1A., “Risk
Factors.” The Company undertakes no obligation to publicly update or
revise any forward looking statements as a result of new information, future
events or otherwise.
Overview
The
Company was formed in May 1995, and currently provides business services to 60
Offices in Colorado, New Mexico, and Arizona staffed by 81 dentists and 33
specialists. The Company has acquired 42 practices (six of which were
consolidated into existing Offices and one of which was closed during 2004) and
opened 26 de novo
Offices (one of which was consolidated into an existing Office). The Company
derives all of its Revenue (as defined below) from its Management Agreements
with the P.C.s. In addition, the Company assumes a number of responsibilities
when it acquires a new practice or develops a de novo Office, which are set
forth in the Management Agreement, as described below. The Company expects to
expand in existing markets primarily by enhancing the operating performance of
its existing Offices and by developing de novo
Offices. The Company has historically expanded in existing markets by
acquiring solo and group dental practices and may do so in the future if an
economically feasible opportunity presents itself.
The
Company was formed with the intention of becoming the leading provider of
business services to dental practices in Colorado. The Company’s growth and
success in the Colorado market led to its expansion into the New Mexico and
Arizona markets. The Company’s growth strategy is to focus on greater
utilization of existing physical capacity through recruiting more dentists and
support staff and through development of de novo Offices and selective
acquisitions.
Components
of Revenue and Expenses
Total
dental group practice revenue (“Revenue”) represents the revenue of the Offices,
reported at estimated realizable amounts, received from third-party payors and
patients for dental services rendered at the Offices. Net revenue represents
Revenue less amounts retained by the Offices. The amounts retained by the
Offices represent amounts paid as compensation to employed dentists and
hygienists. The Company’s net revenue is dependent on the Revenue of the
Offices. Direct expenses consist of the expenses incurred by the Company in
connection with managing the Offices, including salaries and benefits (for
personnel other than dentists and hygienists), dental supplies, dental
laboratory fees, occupancy costs, advertising and marketing, depreciation and
amortization and general and administrative (including office supplies,
equipment leases, management information systems and other expenses related to
dental practice operations). The Company also incurs personnel and
administrative expenses in connection with maintaining a corporate function that
provides management, administrative, marketing, development and professional
services to the Offices.
-
25 -
Under
each of the Management Agreements, the Company provides business and marketing
services at the Offices, including (i) providing capital, (ii) designing and
implementing marketing programs, (iii) negotiating for the purchase of supplies,
(iv) staffing, (v) recruiting, (vi) training of non-dental personnel, (vii)
billing and collecting patient fees, (viii) arranging for certain legal and
accounting services, and (ix) negotiating with managed care organizations. The
P.C. is responsible for, among other things, (i) supervision of all dentists and
dental hygienists, (ii) complying with all laws, rules and regulations relating
to dentists and dental hygienists, and (iii) maintaining proper patient records.
The Company has made, and intends to make in the future, loans to P.C.s in
Colorado, New Mexico and Arizona to fund their acquisition of dental assets from
third parties in order to comply with the laws of such states.
Under the
typical Management Agreement used by the Company, the P.C. pays the Company a
management fee equal to the Adjusted Gross Center Revenue of the P.C. less
compensation paid to the dentists and dental hygienists employed at the Office
of the P.C. Adjusted Gross Center Revenue is comprised of all fees
and charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company’s costs include all direct and indirect
costs, overhead and expenses relating to the Company’s provision of management
services at the Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of Company employees who work at the Office,
(ii) direct costs of all Company employees or consultants who provide services
to or in connection with the Office, (iii) utilities, janitorial, laboratory,
supplies, advertising and other expenses incurred by the Company in carrying out
its obligations under the Management Agreement, (iv) depreciation expense
associated with the P.C.s assets and the assets of the Company used at the
Office, and the amortization of intangible asset value relating to the Office,
(v) interest expense on indebtedness incurred by the Company to finance any of
its obligations under the Management Agreement, (vi) general and malpractice
insurance expenses, lease expenses and dentist recruitment expenses, (vii)
personal property and other taxes assessed against the Company’s or the P.C.s
assets used in connection with the operation of the Office, (viii) out-of-pocket
expenses of the Company’s personnel related to mergers or acquisitions involving
the P.C., (ix) corporate overhead charges or any other expenses of the Company
including the P.C.s pro rata share of the expenses of the accounting and
computer services provided by the Company, and (x) a collection reserve in the
amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all
costs associated with the provision of dental services at the Office are borne
by the Company, other than the compensation and benefits of the dentists and
hygienists who work at the Offices of the P.C.s. This enables the
Company to manage the profitability of the Offices. Each Management
Agreement is for a term of 40 years. Further, each Management
Agreement generally may be terminated by the P.C. only for cause, which includes
a material default by or bankruptcy of the Company. Upon expiration or
termination of a Management Agreement by either party, the P.C. must satisfy all
obligations it has to the Company.
The
Company’s Revenue is derived principally from fee-for-service Revenue and
Revenue from capitated managed dental care plans. Fee-for-service Revenue
consists of P.C. revenue received from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third-party
payment arrangement. Managed dental care Revenue consists of P.C. revenue
received from capitated managed dental care plans, including capitation payments
and patient co-payments. Capitated managed dental care contracts are between
dental benefits organizations and the P.C.s. Under the Management Agreements,
the Company negotiates and administers these contracts on behalf of the P.C.s.
Under a capitated managed dental care contract, the dental group practice
provides dental services to the members of the dental benefits organization and
receives a fixed monthly capitation payment for each plan member covered for a
specific schedule of services regardless of the quantity or cost of services to
the participating dental group practice obligated to provide them. This
arrangement shifts the risk of utilization of these services to the dental group
practice providing the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Office (other than compensation of dentists and hygienists), the risk of
over-utilization of dental services at the Office under capitated managed dental
care plans is effectively shifted to the Company. In addition, dental group
practices participating in a capitated managed dental care plan often receive
supplemental payments for more complicated or elective procedures. In contrast,
under traditional indemnity insurance arrangements, the insurance company pays
whatever reasonable charges are billed by the dental group practice for the
dental services provided. See Item 1. “Business - Payor Mix.”
The Company seeks to increase its fee-for-service business by
increasing the patient volume of existing Offices through effective marketing
and advertising programs, adding additional specialty services and by opening
de novo
Offices. The Company seeks to supplement this fee-for-service
business with Revenue from contracts with capitated managed dental care plans.
Although the Company’s fee-for-service business generally provides a greater
margin than its capitated managed dental care business, capitated managed dental
care business serves to increase facility utilization and dentist productivity.
The relative percentage of the Company’s Revenue derived from fee-for-service
business and capitated managed dental care contracts varies from market to
market depending on the availability of capitated managed dental care contracts
in any particular market and the Company’s ability to negotiate favorable
contractual terms. In addition, the profitability of managed dental care Revenue
varies from market to market depending on the level of capitation payments and
co-payments in proportion to the level of benefits required to be
provided.
-
26 -
Results
of Operations
For the
year ended December 31, 2007, Revenue increased to $59.4 million compared to
$57.1 million for the year ended December 31, 2006, an increase of $2.3 million
or 3.9%. This increase was attributable to de novo Offices generating
$1.8 million in additional Revenue and an increase of $409,000 at existing
Offices for the year ended December 31, 2007.
For the
year ended December 31, 2006, Revenue increased to $57.1 million compared to
$52.5 million for the year ended December 31, 2005, an increase of $4.6 million
or 8.8%. This increase was attributable to de novo Offices generating
$1.7 million in additional Revenue and an increase of $2.9 million at existing
Offices for the year ended December 31, 2006.
The
Company has grown primarily through the ongoing development of a dense dental
practice network and the implementation of its dental practice management
model. During the three years ended December 31, 2007, net revenue
was $36.7 million in 2005, $39.4 million in 2006 and $40.8 million in 2007.
During the three years ended December 31, 2007, contribution from dental Offices
increased from $7.8 million in 2005 to $8.5 million for 2006 and to $8.7 million
for 2007. During the three years ended December 31, 2007, net income
increased from $2.2 million for 2005 to $2.3 million in 2006 and to $2.4 million
in 2007.
The Company’s earnings before interest,
taxes, depreciation, amortization and non cash expense associated with
stock-based compensation (“Adjusted EBITDA”) increased $712,000, or 10.0% to
$7.8 million for the year ended December 31, 2007 from $7.1 million for the year
ended December 31, 2006. Although Adjusted EBITDA is not a generally
accepted accounting principle (“GAAP”) measure of performance or liquidity, the
Company believes that it may be useful to an investor in evaluating the
Company’s ability to meet future debt service, capital expenditures and working
capital requirements. However, investors should not consider these measures in
isolation or as a substitute for operating income, cash flows from operating
activities or any other measure for determining the Company’s operating
performance or liquidity that is calculated in accordance with GAAP. In
addition, because Adjusted EBITDA is not calculated in accordance with GAAP, it
may not necessarily be comparable to similarly titled measures employed by other
companies. A reconciliation of Adjusted EBITDA to net income can be made by
adding depreciation and amortization expense - offices, depreciation and
amortization expense – corporate, stock-based compensation expense, interest
expense/(income), net, and income tax expense to net income as in the table
below.
|
Year
Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
RECONCILIATION
OF ADJUSTED EBITDA:
|
||||||||||||
|
Net
income
|
$ | 2,164,303 | $ | 2,322,974 | $ | 2,437,297 | ||||||
|
Add
back:
|
||||||||||||
|
Depreciation
and amortization - Offices
|
1,703,330 | 2,192,411 | 2,541,995 | |||||||||
|
Depreciation
and amortization - corporate
|
139,512 | 131,356 | 110,270 | |||||||||
|
Stock-based
compensation expense
|
162,060 | 653,174 | 729,394 | |||||||||
|
Interest
expense (income), net
|
(12,204 | ) | 226,835 | 365,140 | ||||||||
|
Income
tax expense
|
1,244,960 | 1,596,785 | 1,651,792 | |||||||||
|
Adjusted
EBITDA
|
5,401,961 | 7,123,535 | 7,835,888 | |||||||||
|
Reimbursement
of income taxes related to restricted
|
||||||||||||
|
stock
grant
|
585,844 | - | - | |||||||||
|
Adjusted
EBITDA before reimbursement of income
|
||||||||||||
|
taxes
related to restricted stock grant
|
$ | 5,987,805 | $ | 7,123,535 | $ | 7,835,888 | ||||||
-
27 -
At
December 31, 2007, the Company’s total assets of $20.9 million included $11.4
million of identifiable intangible assets related to Management Agreements. At
that date, the Company’s total shareholders’ equity was $9.5 million. The
Company’s retained earnings as of December 31, 2007 were approximately $6.5
million and the Company had a working capital deficit on that date of
approximately $858,000. During 2007, the Company had capital
expenditures of $714,000 and purchased approximately $4.1 million of Common
Stock while decreasing total bank debt by $1.7 million.
The
Company’s Revenue from capitated managed dental care plans was 22.3% of total
dental group practice revenue in 2007, compared to 21.8% in 2006 and 20.2% in
2005.
Revenue,
as defined in this report, is total dental group practice revenue generated at
the Company’s Offices from professional services provided to
patients. Amounts retained by group practices represent wage expense
to the dentists and hygienists and is subtracted from total dental group
practice revenue to arrive at net revenue. The Company reports net
revenue in its financial statements to comply with Emerging Issues Task Force
Issue No. 97-2, Application of SFAS No. 94 (Consolidation of All Majority Owned
Subsidiaries) and APB Opinion No. 16 (Business Combinations) to Physician
Practice Management Entities and Certain Other Entities With Contractual
Management Arrangements. Revenue is not a generally accepted
accounting principles measure. The Company discloses Revenue because
it is a critical component for management’s evaluation of Office
performance. However, investors should not consider this measure in
isolation or as a substitute for net revenue, operating income, cash flows from
operating activities or any other measure for determining the Company’s
operating performance or liquidity that is calculated in accordance with
generally accepted accounting principles. The following table
reconciles Revenue to net revenue (excluding discontinued
operations).
|
Years
Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Total
dental group practice revenue
|
$ | 52,526,276 | $ | 57,141,226 | $ | 59,390,457 | ||||||
|
Less
- amounts retained by Offices
|
15,810,159 | 17,754,230 | 18,600,202 | |||||||||
|
Net
revenue
|
$ | 36,716,117 | $ | 39,386,996 | $ | 40,790,255 | ||||||
-
28 -
The
following table sets forth the percentages of net revenue represented by certain
items reflected in the Company’s Consolidated Statements of Income. The
information contained in the table represents the historical results of the
Company. The information that follows should be read in conjunction with the
Company’s consolidated financial statements and related notes
thereto.
|
Years
Ended December 31,
|
|||||||
|
2005
|
2006
|
2007
|
|||||
|
Net
revenue
|
100.0%
|
100.0%
|
100.0%
|
||||
|
Direct
expenses:
|
|||||||
|
Clinical salaries and benefits
|
37.0
|
36.1
|
36.2
|
||||
|
Dental supplies
|
6.0
|
5.8
|
5.7
|
||||
|
Laboratory fees
|
6.7
|
6.6
|
6.4
|
||||
|
Occupancy
|
10.5
|
10.8
|
11.3
|
||||
|
Advertising and marketing
|
2.6
|
2.0
|
1.7
|
||||
|
Depreciation and amortization
|
4.6
|
5.6
|
6.2
|
||||
|
General and administrative
|
11.4
|
11.7
|
11.3
|
||||
|
78.8
|
78.5
|
78.7
|
|||||
|
Contribution
from dental offices
|
21.2
|
21.5
|
21.3
|
||||
|
Corporate
expenses:
|
|||||||
|
General and administrative
|
11.5
|
(1)
|
10.6
|
(1)
|
10.1
|
(1)
|
|
|
Depreciation and amortization
|
0.4
|
0.3
|
0.3
|
||||
|
Operating
income
|
9.3
|
10.5
|
10.9
|
||||
|
Interest
expense, net
|
-
|
0.6
|
0.9
|
||||
|
Income
before income taxes
|
9.3
|
10.0
|
10.0
|
||||
|
Income
tax expense
|
3.4
|
4.1
|
4.0
|
||||
|
Net
income
|
5.9%
|
5.9%
|
6.0%
|
||||
|
(1)
|
Corporate
expense - general and administrative includes $162,060
of equity compensation for a stock award and $585,844 one-time
expense related to the reimbursement of an employees's income taxes in
connection with a stock award for the year ended December 31,
2005, $324,120 of equity compensation for a stock
award and $329,054 of stock-based compensation expense pursuant to SFAS
123 (R) for the year ended December 31, 2006 and $324,120
of equity compensation for a stock award and $405,274 of
stock-based compensation expense pursuant to SFAS 123 (R) for the year
ended December 31, 2007.
|
||||||
-
29 -
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net
revenue. Net revenue increased to $40.8 million for the
year ended December 31, 2007 compared to $39.4 million for the year ended
December 31, 2006, an increase of $1.4 million or 3.6%. This increase was
attributable to de novo
Offices generating $1.3 million in additional net revenue and an increase of
$129,000 at existing Offices for the year ended December 31, 2007.
Clinical salaries and
benefits. Clinical salaries and benefits increased to
$14.8 million for the year ended December 31, 2007 compared to $14.2 million for
the year ended December 31, 2006, an increase of $560,000 or
3.9%. This increase is the result of additional employees to support
the increased Revenue in 2007 over 2006 and general wage increases granted
during 2007. As a percentage of net revenue, clinical salaries and
benefits increased from 36.1% in 2006 to 36.2% in 2007.
Dental
supplies. Dental supplies remained constant at $2.3
million for the years ended December 31, 2007 and 2006. As a
percentage of net revenue, dental supplies decreased from 5.8% in 2006 to 5.7%
in 2007.
Laboratory
fees. Laboratory fees remained constant at $2.6 million
for the years ended December 31, 2007 and 2006. As a percentage of
net revenue, laboratory fees decreased from 6.6% in 2006 to 6.4% in
2007.
Occupancy. Occupancy
expenses increased to $4.6 million for the year ended December 31, 2007 from
$4.3 million for the year ended December 31, 2006, an increase of $331,000 or
7.8%. This increase was due to increased rental payments resulting from the
renewal of Office leases at current market rates for Offices whose leases
expired subsequent to the 2006 period as well as the addition of four de novo Offices during
2006. As a percentage of net revenue, occupancy expense increased to
11.3% in 2007 from 10.8% in 2006.
Advertising and
marketing. Advertising and marketing decreased to
$678,000 for the year ended December 31, 2007 from $797,000 for the year ended
December 31, 2006, a decrease of $119,000 or 14.9%. This decrease is
attributable to a shift away from a comprehensive television and print campaign
in the Albuquerque, New Mexico and Colorado Springs, Colorado markets, which
commenced in January 2006 and ran through October 2006 to a limited television
advertising campaign in the Denver, Colorado market, which ran from March 2007
through July 2007. As a percentage of net revenue, advertising and
marketing decreased to 1.7% in 2007 from 2.0% in 2006.
Depreciation and
amortization. Depreciation and amortization, which
consists of depreciation and amortization expense incurred at the Offices,
increased to $2.5 million for the year ended December 31, 2007 from $2.2 million
for the year ended December 31, 2006, an increase of $350,000 or
16.0%. This increase was primarily the result of tenant improvement and
equipment purchased at the four de novo Offices and the
expansion of one Office during 2006 along with recognizing an impairment charge
of $104,000 in amortization expense at one Office which was necessary in order
to write down its value to market. As a percentage of net revenue,
depreciation and amortization increased to 6.2% in 2007 from 5.6% in
2006.
General and
administrative. General and administrative expenses
attributable to the Offices remained constant at $4.6 million for the years
ended December 31, 2007 and 2006. As a percentage of net revenue, Office general
and administrative expenses decreased from 11.7% in 2006 to 11.3% in
2007.
Contribution from dental
Offices. As a result of the above, contribution from
dental Offices increased to $8.7 million for the year ended December 31, 2007
from $8.5 million for the year ended December 31, 2006, an increase of $231,000
or 2.7%. As a percentage of net revenue, contribution from dental
Offices decreased to 21.3% in 2007 from 21.5% in 2006.
Corporate expenses - general and
administrative. Corporate expenses - general and
administrative decreased to $4.1 million for the year ended December 31, 2007
from $4.2 million for the year ended December 31, 2006, a decrease of $56,000 or
1.3%. As a percentage of net revenue, corporate expenses - general and
administrative decreased to 10.1% in 2007 compared to 10.6% in
2006.
Corporate expenses - depreciation
and amortization. Corporate expenses - depreciation and
amortization decreased to $110,000 for the year ended December 31, 2007 from
$131,000 for the year ended December 31, 2006, a decrease of $21,000 or 16.1%.
This decrease was primarily the result of older assets becoming fully
depreciated somewhat offset by the addition of new depreciable
assets. As a percentage of net revenue, corporate expenses -
depreciation and amortization remained constant at 0.3% in 2007 and
2006.
-
30 -
Operating
income. As a result of the above, operating income
increased to $4.5 million for the year ended December 31, 2007 from $4.1 million
for the year ended December 31, 2006, an increase of $308,000 or
7.4%. As a percentage of net revenue, operating income increased to
10.9% in 2007 from 10.5% in 2006.
Interest expense/(income),
net. Interest expense, net increased to $365,000 for the
year ended December 31, 2007 from $227,000 for the year ended December 31, 2006,
an increase of $138,000 or 61%. This increase in interest expense is
attributable to the interest expense associated with the Term Loan which was
entered into on October 5, 2006 to finance the Tender Offer. As a
percentage of net revenue, interest expense, net increased to 0.9% in 2007 from
0.6% in 2006.
Net income. As a
result of the above, the Company’s net income was $2.4 million for the year
ended December 31, 2007 compared to net income of $2.3 million for the year
ended December 31, 2006, an increase of $114,000 or 4.9%. As a
percentage of net revenue, net income increased to 6.0% in 2007 from 5.9% in
2006. Net income for the year ended December 31, 2007 was net of
income tax expense of $1.7 million while net income for the year ended December
31, 2006 was net of income tax expense of $1.6 million.
Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net
revenue. Net revenue increased to $39.4 million for the
year ended December 31, 2006 compared to $36.7 million for the year ended
December 31, 2005, an increase of $2.7 million or 7.3%. This increase was
attributable to de novo
Offices generating $1.0 million in additional net revenue and an increase of
$1.7 million at existing Offices for the year ended December 31,
2006.
Clinical salaries and
benefits. Clinical salaries and benefits increased to
$14.2 million for the year ended December 31, 2006 compared to $13.6 million for
the year ended December 31, 2005, an increase of $623,000 or
4.6%. This increase is the result of additional employees to support
the increased Revenue and the increased number of dentists working in 2006 over
2005 and general wage increases granted during 2006. As a percentage
of net revenue, clinical salaries and benefits decreased from 37.0% in 2005 to
36.1% in 2006.
Dental
supplies. Dental supplies increased to $2.3 million for
the year ended December 31, 2006 compared to $2.2 million for the year ended
December 31, 2005, an increase of $63,000 or 2.9%. This increase is
attributable to increased Revenue. Additionally, the need to make initial dental
supply orders, which tend to be larger than ongoing dental supply orders, for
the four de novo
Offices that were opened during 2006 contributed to the increased dental supply
expense. As a percentage of net revenue, dental supplies decreased from 6.0% in
2005 to 5.8% in 2006.
Laboratory
fees. Laboratory fees increased to $2.6 million for the
year ended December 31, 2006 compared to $2.4 for the year ended December 31,
2005, an increase of $145,000 or 5.9%. This increase is attributable to
increased Revenue. As a percentage of net revenue, laboratory fees decreased
from 6.7% in 2005 to 6.6% in 2006.
Occupancy. Occupancy
expenses increased to $4.3 million for the year ended December 31, 2006 from
$3.9 million for the year ended December 31, 2005, an increase of $404,000 or
10.5%. This increase was due to increased rental payments resulting from
the renewal of Office leases at current market rates for Offices whose leases
expired subsequent to the 2005 period as well as rent for four de novo Offices opened during
2006 and two de novo
Offices opened during the latter part of 2005. As a percentage of net
revenue, occupancy expense increased to 10.8% in 2006 from 10.5% in
2005.
Advertising and
marketing. Advertising and marketing decreased to
$797,000 for the year ended December 31, 2006 from $952,000 for the year ended
December 31, 2005, a decrease of $155,000 or 16.3%. This decrease is
attributable to a shift in the Company’s television and print advertising from
the relatively expensive Denver, Colorado market in 2005 to the
Albuquerque, New Mexico and Colorado Springs, Colorado markets in 2006. As a
percentage of net revenue, advertising and marketing decreased to 2.0% in 2006
from 2.6% in 2005.
Depreciation and
amortization. Depreciation and amortization, which
consists of depreciation and amortization expense incurred at the Offices,
increased to $2.2 million for the year ended December 31, 2006 from $1.7 million
for the year ended December 31, 2005, an increase of $489,000 or
28.7%. This increase was primarily the result of tenant improvement and
equipment purchased at the four de novo Offices and the
expansion of one Office. As a percentage of net revenue, depreciation
and amortization increased to 5.6% in 2006 from 4.6% in 2005.
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31 -
General and
administrative. General and administrative expenses
attributable to the Offices increased to $4.6 million for the year ended
December 31, 2006 from $4.2 million for the year ended December 31, 2005, an
increase of $420,000 or 10.1%. The addition of four de novo Offices accounted for
$167,000 of the increase and the remaining was the result of higher costs for
recruiting, office supplies, repairs and maintenance, laundry, postage, mileage
reimbursement, bad debt expense, credit card fees, and gross receipts tax based
on higher revenues in the New Mexico Offices. As a percentage of net revenue,
Office general and administrative expenses increased from 11.4% in 2005 to 11.7%
in 2006.
Contribution from dental
Offices. As a result of the above, contribution from
dental Offices increased to $8.5 million for the year ended December 31, 2006
from $7.8 million for the year ended December 31, 2005, an increase of $681,000
or 8.8%. As a percentage of net revenue, contribution from dental
Offices increased to 21.5% in 2006 from 21.2% in 2005.
Corporate expenses - general and
administrative. Corporate expenses - general and
administrative remained constant at $4.2 million for the years ended December
31, 2006 and 2005. As a percentage of net revenue, corporate expenses - general
and administrative decreased to 10.6% in 2006 compared to 11.5% in
2005.
Corporate expenses - depreciation
and amortization. Corporate expenses - depreciation and
amortization decreased to $131,000 for the year ended December 31, 2006 from
$140,000 for the year ended December 31, 2005, a decrease of $8,000 or 5.9%.
This decrease was primarily the result of older assets becoming fully
depreciated somewhat offset by the addition of new depreciable
assets. As a percentage of net revenue, corporate expenses -
depreciation and amortization decreased to 0.3% in 2006 from 0.4% in
2005.
Operating
income. As a result of the above, operating income
increased to $4.1 million for the year ended December 31, 2006 from $3.4 million
for the year ended December 31, 2005, an increase of $750,000 or
22.1%. As a percentage of net revenue, operating income increased to
10.5% in 2006 from 9.3% in 2005.
Interest expense/(income),
net. Interest expense, net increased to $227,000 for the
year ended December 31, 2006 from ($12,000) for the year ended December 31,
2005, an increase of $239,000. This increase in interest expense is attributable
to higher interest expense on the Company’s Credit Facility due to increased
rates and increased balances on the credit line, the interest associated with
the Term Loan and lower charges for late payments on customer accounts
receivable. As a percentage of net revenue, interest expense,
net increased to 0.6% in 2006 from 0.0% in 2005.
Net income. As a
result of the above, the Company’s net income was $2.3 million for the year
ended December 31, 2006 compared to net income of $2.2 million for the year
ended December 31, 2005, an increase of $159,000 or 7.3%. As a
percentage of net revenue, net income remained constant at 5.9% for the years
ended 2006 and 2005. Net income for the year ended December 31, 2006
was net of income tax expense of $1.6 million while net income for the year
ended December 31, 2005 was net of income tax expense of $1.2
million.
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32 -
Critical Accounting
Policies
The
Company’s financial statements have been prepared in accordance with accounting
principles generally accepted in the United States, which require the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosures. A
summary of those significant accounting policies can be found in the Company’s
Notes to Consolidated Financial Statements. The estimates used by management are
based upon the Company’s historical experiences combined with management’s
understanding of current facts and circumstances. Certain of the Company’s
accounting policies are considered critical as they are both important to the
portrayal of the Company’s financial condition and the results of its operations
and require significant or complex judgments on the part of management.
Management has not determined how reported amounts would differ based on the
application of different accounting policies. Management has also not determined
the likelihood that materially different amounts could be reported under
different conditions or using different assumptions. Management
believes that the following represent the critical accounting policies of the
Company as described in Financial Reporting Release No. 60, “Cautionary Advice
Regarding Disclosure About Critical Accounting Policies”, which was issued by
the Securities and Exchange Commission:
Impairment of
Intangible and Long-lived Assets
At
December 31, 2007, intangible assets on the Company’s consolidated balance sheet
were $11.4 million, representing 54.5% of the Company’s total assets at that
date. The Company's dental practice acquisitions involve the purchase
of tangible and intangible assets and the assumption of certain liabilities of
the acquired Offices. As part of the purchase price allocation, the Company
allocates the purchase price to the tangible and intangible assets acquired and
liabilities assumed, based on estimated fair market values. Costs of acquisition
in excess of the net estimated fair value of tangible assets acquired and
liabilities assumed are allocated to the Management Agreement. The Management
Agreement represents the Company's right to manage the Offices during the
40-year term of the agreement. The assigned value of the Management Agreement is
amortized using the straight-line method over a period of 25
years. The Company reviews the recorded amount of intangible assets
and other long-lived assets for impairment for each Office whenever events or
changes in circumstances indicate the carrying amount of the assets may not be
recoverable. If this review indicates that the carrying amount of the
assets may not be recoverable as determined based on the undiscounted cash flows
of each Office, whether acquired or developed, the carrying value of the asset
is reduced to fair value. Among the factors that the Company will
continually evaluate are unfavorable changes in each Office, relative market
share and local market competitive environment, current period and forecasted
operating results, cash flow levels of Offices and the impact on the net revenue
earned by the Company, and the legal and regulatory factors governing the
practice of dentistry. As of December 31, 2007, the Company
determined that intangible assets were overstated by approximately
$104,000. This amount was determined by comparing the intangible
asset and property and equipment value at one Office to an independent appraised
value for that Office. As a result, the Company recognized an
impairment charge of $104,000 in amortization expense in December
2007.
Allowance
for Doubtful Accounts
The
Company’s allowance for doubtful accounts reflects a reserve that reduces
customer accounts receivable to the net amount estimated to be collectible.
Estimating the credit-worthiness of customers and the recoverability of customer
accounts requires management to exercise considerable judgment. In
estimating uncollectible amounts, management considers factors such as general
economic and industry-specific conditions, historical customer performance and
anticipated customer performance. While management considers the Company’s
processes to be adequate to effectively quantify its exposure to doubtful
accounts, changes in economic, industry or specific customer conditions may
require the Company to adjust its allowance for doubtful accounts.
Deferred
Income Taxes
Deferred
income taxes are recognized for the expected tax consequences in future years
for differences between the tax bases of assets and liabilities and their
financial reporting amounts, based upon enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. The Company’s significant deferred tax assets are related to
accruals not currently deductible, allowance for doubtful accounts and
depreciation expense for tax which is less than depreciation expense for
books. The Company has not established a valuation allowance to
reduce deferred tax assets as the Company expects to fully recover these amounts
in future periods. The Company’s significant deferred tax liability is the
result of intangible asset amortization expense for tax being greater than the
intangible asset amortization expense for books. Management reviews and adjusts
those estimates annually based upon the most current information available.
However, because the recoverability of deferred taxes is directly dependent upon
the future operating results of the Company, actual recoverability of deferred
taxes may differ materially from management’s estimates.
-
33 -
Liquidity
and Capital Resources
The
Company finances its operations and growth through a combination of cash
provided by operating activities and a bank line of credit (the “Credit
Facility”).
Net cash
provided by operating activities was $4.4 million, $5.3 million and $5.7 million
for the years ended December 31, 2005, 2006 and 2007, respectively. During the
year ended December 31, 2007, the Company’s cash provided by operating
activities excluding net income and non-cash items consisted primarily of an
increase in accounts payable, accrued expenses and accrued payroll of
approximately $19,000, a decrease in deferred charges and other assets of
approximately $10,000, offset by an increase in accounts receivable of
approximately $569,000, a decrease in income taxes payable/receivable of
approximately $141,000, an increase in prepaid expenses and other assets of
approximately $23,000 and a decrease in other long-term obligations of
$35,000. During the year ended December 31, 2006, the Company’s cash
provided by operating activities excluding net income and non-cash items
consisted primarily of an increase in other long-term obligations of
approximately $131,000, a decrease of prepaid expenses and other assets of
approximately $8,000, offset by an increase in deferred charges and other assets
of approximately $28,000, a decrease in accounts payable, accrued expenses and
accrued payroll of approximately $77,000, an increase in accounts receivable of
$611,000 and a decrease in income taxes payable of approximately
$61,000. During the year ended December 31, 2005, the Company’s
cash provided by operating activities excluding net income and non-cash items
consisted primarily of an increase in income taxes payable of approximately
$256,000 and a decrease of prepaid expenses and other assets of approximately
$195,000, offset by a decrease in accounts payable, accrued expenses and accrued
payroll of approximately $103,000 and an increase in accounts receivable of
$913,000.
Net cash
used in investing activities was $1.9 million, $3.2 million and $714,000 for the
years ended December 31, 2005, 2006 and 2007 respectively. During the
year ended December 31, 2007, the Company invested $667,000 in the purchase of
additional property and equipment and $48,000 in the development of de novo Offices. During the
year ended December 31, 2006, the Company invested $1.3 million in the purchase
of additional property and equipment and $2.0 million in the development of
de novo Offices. During
the year ended December 31, 2005, the Company invested $1.3 million in the
purchase of additional property and equipment and $569,000 in the development of
de novo
Offices.
For the
years ended December 31, 2005, 2006 and 2007, net cash used in financing
activities was $2.3 million, $2.2 million and $4.9 million,
respectively. For the year ended December 31, 2007, net cash used in
financing activities was comprised of $1.3 million of proceeds from the exercise
of Common Stock options and $955,000 from the tax benefit of Common Stock
options exercised. This was offset by $4.1 million for the purchase of Common
Stock, $1.2 million for the payment of Common Stock dividends, $920,000 to pay
down the Term Loan, a $798,000 decrease in borrowings under the Credit Facility
and $34,000 in repayments of long-term debt. For the year ended December 31,
2006, net cash used in financing activities was comprised of a $4.6 million
increase in borrowings under the Credit Facility and Term Loan, $423,000 of
proceeds from the exercise of Common Stock options and $237,000 from the tax
benefit of Common Stock options exercised. This was offset by $6.1 million for
the purchase of Common Stock, $1.1 million for the payment of Common Stock
dividends and $145,000 for the repayment of long-term debt. For the year ended
December 31, 2005, net cash used in financing activities was comprised of a $2.0
million increase in borrowings under the Credit Facility, $600,000 of proceeds
from the exercise of Common Stock options and $403,000 from the tax benefit of
Common Stock options exercised. This was offset by $4.3 million for the purchase
of Common Stock, $802,000 for the payment of Common Stock dividends and $167,000
for the repayment of long-term debt.
On April
30, 2007, the Company amended its Credit Facility. The Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $7.0 million at either, or a combination of, the
lender’s Base Rate or at a LIBOR rate plus a LIBOR Rate Margin, at the Company’s
option. The lender’s Base Rate computes interest at the higher of the
lender’s “prime rate” or the Federal Funds Rate plus one-half percent (0.5%). As
of December 31, 2007, the Base Rate was 7.25%. The LIBOR option computes
interest at the LIBOR Rate as of the date such LIBOR Rate loan was made plus a
LIBOR Rate Margin of 1.25%. As of December 31, 2007, the LIBOR Rate
was 6.5%. A commitment fee of 0.25% on the average daily unused amount of the
revolving loan commitment during the preceding quarter will also be
assessed. The Company may prepay any Base Rate Loan at any time and
any LIBOR Rate Loan upon not less than three business days prior written notice
given to the lender, but the Company will be responsible for any loss or cost
incurred by the lender in liquidating or employing deposits required to fund or
maintain the LIBOR Rate loan. The Credit Facility expires on May 31,
2009. At December 31, 2007, the Company had $2.3 million outstanding and $4.7
million available for borrowing under the revolving loan. This consisted of
$955,000 outstanding under the Base Rate Option and $1.3 million outstanding
under the LIBOR Rate option. The Credit Facility requires the Company to
maintain certain financial ratios on an ongoing basis. At December
31, 2007, the Company was in full compliance with all of its covenants under
this agreement.
-
34 -
On
October 5, 2006, the Company accepted for payment, at a purchase price of $21.75
per share, 212,396 shares of its Common Stock that were properly tendered and
not withdrawn pursuant to the Company’s “dutch auction” tender offer. The
212,396 shares purchased were comprised of 175,000 shares the Company offered to
purchase and 37,396 shares that were purchased pursuant to the Company's right
to purchase up to an additional 2% of the outstanding shares as of August 31,
2006, without extending the Tender Offer in accordance with applicable
securities laws. These shares represented approximately 9.2% of the shares
outstanding as of September 30, 2006. The Tender Offer was funded from a $4.6
million term loan. Under the Term Loan, $2.3 million was borrowed at a fixed
interest rate of 7.05% and the remaining $2.3 million was borrowed at a floating
interest rate of Libor plus 1.5%. The principal amount borrowed will be paid
quarterly in 20 equal payments of approximately $230,000 plus interest beginning
December 31, 2006. The Term Loan matures on September 30, 2011.
On
February 10, 2005, the Company announced an increase in the amount of the
quarterly cash dividend from $.038 per share to $.10 per share. On
January 10, 2006, the Company announced an increase in the amount of the
quarterly dividend from $.10 per share to $.13 per share. On January 9, 2007,
the Company announced an increase in the amount of the quarterly dividend from
$.13 to $.15 per share. On January 17, 2008, the Company announced an
increase in the amount of the quarterly dividend from $.15 to $.17 per
share.
The
Company believes that cash generated from operations and borrowings under its
Credit Facility will be sufficient to fund its anticipated working capital
needs, capital expenditures and dividend payments for at least the next 12
months. In order to meet its long-term liquidity needs, the Company
may need to issue additional equity and debt securities, subject to market and
other conditions. There can be no assurance that such additional financing will
be available on terms acceptable to the Company. The failure to raise the funds
necessary to finance its future cash requirements could adversely affect the
Company’s ability to pursue its strategy and could negatively affect its
operations in future periods. See Item 1A., “Risk Factors - Need for Additional
Capital; Uncertainty of Additional Financing” in this Annual
Report.
At
December 31, 2007, the Company’s material commitments for capital expenditures
totaled approximately $685,000, which includes the development of one de novo Office, the remodel
of one existing Office and the implementation of a new time clock
system. The Company anticipates that these capital expenditures will
be funded by cash on hand, cash generated by operations, or borrowings under the
Company’s Credit Facility.
The
Company from time to time may purchase its Common Stock on the open market. The
shares purchased and the purchase price per share for transactions prior to
August 1, 2005 have been adjusted to reflect the 2-for-1 stock split. During
2005, the Company, in 40 separate transactions, purchased 311,961 shares of its
Common Stock for total consideration of approximately $4.3 million at prices
ranging from $9.00 to $19.31 per share. During 2006, the Company, in 67 separate
transactions, purchased 305,161 shares of its Common Stock for total
consideration of approximately $6.1 million at prices ranging from $15.00 to
$21.75 per share. In April 2006, the Company purchased 54,250 shares at a price
of $15.00 per share through a private transaction that was approved by the Board
of Directors. On October 5, 2006, the Company purchased, through a Board of
Directors approved Dutch Auction Tender Offer, 212,396 shares of its Common
Stock at a price of $21.75 per share for total consideration of $4.6 million.
During 2007, the Company, in 27 separate transactions, purchased 196,791 shares
of its Common Stock for a total consideration of approximately $4.1 million at
prices ranging from $18.50 to $24.33 per share. In August 2007, the Company
purchased 100,000 shares at a price of $20.75 per share through a private
transaction that was approved by the Board of Directors. In December
2007, the Company purchased 49,204 shares at a price of $21.00 per share through
a private transaction that was approved by the Board of Directors. As
of December 31, 2007, approximately $174,000 of the previously authorized amount
was available for open-market purchases. On January 23, 2008, the
Company announced that the Board of Directors had approved an increase in the
authorized amount up to $1 million of stock repurchases.
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35 -
Recent
Accounting Pronouncements
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
regarding the process of quantifying financial statement misstatements and the
potential under current practice for the build up of improper amounts on the
balance sheet. The Company has adopted the bulletin during 2006. The adoption
did not have a material effect on the Company’s consolidated financial
statements.
In
September 2006, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS
No. 157”), to establish a consistent framework for measuring fair value and
expand disclosures on fair value measurements. The provisions of SFAS
No. 157 are effective beginning in our fiscal year 2008 and are currently
not expected to have a material effect on the Company’s consolidated financial
statements.
In
February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No.
159 permits companies to elect to follow fair value accounting for certain
financial assets and liabilities in an effort to mitigate volatility in earnings
without having to apply complex hedge accounting provisions. The
standard also establishes presentation and disclosure requirements designed to
facilitate comparison between entities that choose different measurement
attributes for similar types of assets and liabilities. The
provisions of SFAS No. 159 are effective beginning in our fiscal year 2008 and
are currently not expected to have a material effect on the Company’s
consolidated financial statements.
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141R, Business Combinations, and
Statement of Financial Accounting Standards No. 160, Noncontroling Intererests in
Consolidated Financial Statements, an amendment of ARB No.
51. These new standards significantly change the accounting for and
reporting of business combination transactions and noncontrolling interests
(previously referred to minority interests) in consolidated financial
statements. These statements are effective for the Company beginning
on January 1, 2009. The Company is currently evaluating the
provisions of FAS 141(R) and FAS 160.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Market
risk represents the risk of loss that may impact the financial position, results
of operations or cash flows of the Company due to adverse changes in financial
and commodity market prices and rates. Historically, the Company has not used
derivative instruments or engaged in hedging activities. On October 12, 2006,
the Company entered into a fixed-for-floating interest rate swap transaction on
a 59 month Term Loan. The Company elected to designate it as a cash flow
hedge. In December 2007, the Company recognized, on its balance
sheet, approximately $34,000 of other comprehensive loss to mark down the value
of the cash flow hedge net of taxes.
Interest Rate
Risk. The interest payable on the Company’s Credit
Facility and a portion of the Term Loan is variable based upon the LIBOR rate
and the prime rate and, therefore, affected by changes in market interest rates.
At December 31, 2007, $1.7 million (variable portion only) was outstanding under
the Term Loan and $1.3 million under the Credit Facility with a interest rate of
6.5% (LIBOR) and $955,000 was outstanding under the Credit Facility with an
interest rate of 7.25% (Prime). The Company may repay the Credit Facility and
Term Loan balance in full at any time without penalty. As a result,
the Company does not believe that any reasonably possible near-term changes in
interest rates would result in a material effect on future earnings, fair values
or cash flows of the Company. The Company estimates that a 1.0%
increase in the interest rate on both the Credit Facility and the Term Loan
would have resulted in additional interest expense of approximately $43,000 for
the year ended December 31, 2007.
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36 -
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
INDEX
TO FINANCIAL STATEMENTS
Birner
Dental Management Services, Inc. and subsidiaries’ consolidated financial
statements as of December 31, 2006 and 2007 and for each of the three years
ended December 31, 2007:
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
38
|
|
|
Consolidated
Balance Sheets
|
39
|
|
|
Consolidated
Statements of Income
|
40
|
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive
Income
|
41
|
|
|
Consolidated
Statements of Cash Flows
|
42
|
|
|
Notes
to Consolidated Financial Statements
|
44
|
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37 -
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Birner
Dental Management Services, Inc.
Denver,
Colorado
We have
audited the accompanying consolidated balance sheets of Birner Dental Management
Services, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of income, shareholders’ equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2007. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Birner Dental Management Services,
Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
We were
not engaged to examine management's assertions about the effectiveness of Birner
Dental Management Services, Inc. internal control over financial reporting as of
December 31, 2007 included in item 9A of this report on Form 10-K and,
accordingly, we do not express an opinion thereon.
/s/ HEIN & ASSOCIATES LLP
HEIN
& ASSOCIATES LLP
Denver,
Colorado,
March 31,
2008
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38 -
|
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
December
31,
|
||||||||
|
ASSETS
|
2006
|
2007
|
||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 888,186 | $ | 964,150 | ||||
|
Accounts
receivable, net of allowance for doubtful
|
||||||||
|
accounts
of $288,513 and $291,827, respectively
|
3,103,922 | 3,008,550 | ||||||
|
Deferred
tax asset
|
185,671 | 178,591 | ||||||
|
Income
taxes receivable
|
- | 26,817 | ||||||
|
Prepaid
expenses and other assets
|
597,283 | 620,365 | ||||||
|
Total
current assets
|
4,775,062 | 4,798,473 | ||||||
|
PROPERTY
AND EQUIPMENT, net
|
5,592,672 | 4,533,531 | ||||||
|
OTHER
NONCURRENT ASSETS:
|
||||||||
|
Intangible
assets, net
|
12,272,358 | 11,393,590 | ||||||
|
Deferred
charges and other assets
|
181,860 | 171,687 | ||||||
|
Total
assets
|
$ | 22,821,952 | $ | 20,897,281 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 1,648,498 | $ | 1,945,420 | ||||
|
Accrued
expenses
|
1,398,267 | 1,334,785 | ||||||
|
Accrued
payroll and related expenses
|
1,596,770 | 1,456,477 | ||||||
|
Income
taxes payable
|
114,016 | - | ||||||
|
Current
maturities of long-term debt
|
953,561 | 920,000 | ||||||
|
Total
current liabilities
|
5,711,112 | 5,656,682 | ||||||
|
LONG-TERM
LIABILITIES:
|
||||||||
|
Deferred
tax liability, net
|
734,234 | 633,667 | ||||||
|
Long-term
debt, net of current maturities
|
6,502,411 | 4,784,511 | ||||||
|
Other
long-term obligations
|
326,550 | 291,266 | ||||||
|
Total
liabilities
|
13,274,307 | 11,366,126 | ||||||
|
COMMITMENTS,
CONTINGENCIES AND SUBSEQUENT EVENTS (Note 9)
|
||||||||
|
SHAREHOLDERS'
EQUITY:
|
||||||||
|
Preferred
Stock, no par value, 10,000,000 shares
|
||||||||
|
authorized;
none outstanding
|
- | - | ||||||
|
Common
Stock, no par value, 20,000,000 shares
|
||||||||
|
authorized;
2,132,461 and 2,123,440 shares issued and
|
||||||||
|
outstanding,
respectively
|
4,191,349 | 3,028,515 | ||||||
|
Retained
earnings
|
5,356,296 | 6,536,796 | ||||||
|
Accumulated
other comprehensive loss
|
- | (34,156 | ) | |||||
|
Total
shareholders' equity
|
9,547,645 | 9,531,155 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 22,821,952 | $ | 20,897,281 | ||||
The
accompanying notes are an integral part of these consolidated balance
sheets.
-
39 -
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
Years
Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
NET
REVENUE:
|
$ | 36,716,117 | $ | 39,386,996 | $ | 40,790,255 | ||||||
|
DIRECT
EXPENSES:
|
||||||||||||
|
Clinical
salaries and benefits
|
13,578,650 | 14,201,712 | 14,761,863 | |||||||||
|
Dental
supplies
|
2,215,685 | 2,279,107 | 2,316,044 | |||||||||
|
Laboratory
fees
|
2,446,344 | 2,591,499 | 2,615,017 | |||||||||
|
Occupancy
|
3,864,640 | 4,268,641 | 4,599,981 | |||||||||
|
Advertising
and marketing
|
951,916 | 797,042 | 678,488 | |||||||||
|
Depreciation
and amortization
|
1,703,330 | 2,192,411 | 2,541,995 | |||||||||
|
General
and administrative
|
4,183,471 | 4,603,745 | 4,593,316 | |||||||||
| 28,944,036 | 30,934,157 | 32,106,704 | ||||||||||
|
Contribution
from dental offices
|
7,772,081 | 8,452,839 | 8,683,551 | |||||||||
|
CORPORATE
EXPENSES:
|
||||||||||||
|
General
and administrative
|
4,235,510 | (1) | 4,174,889 | (1) | 4,119,052 | (1) | ||||||
|
Depreciation
and amortization
|
139,512 | 131,356 | 110,270 | |||||||||
|
Operating
income
|
3,397,059 | 4,146,594 | 4,454,229 | |||||||||
|
Interest
expense (income), net
|
(12,204 | ) | 226,835 | 365,140 | ||||||||
|
Income
before income taxes
|
3,409,263 | 3,919,759 | 4,089,089 | |||||||||
|
Income
tax expense
|
1,244,960 | 1,596,785 | 1,651,792 | |||||||||
|
Net
Income
|
$ | 2,164,303 | $ | 2,322,974 | $ | 2,437,297 | ||||||
|
Net
income per share of Common Stock - Basic
|
$ | 0.91 | $ | 1.02 | $ | 1.16 | ||||||
|
Net
income per share of Common Stock - Diluted
|
$ | 0.82 | $ | 0.94 | $ | 1.08 | ||||||
|
Cash
dividends per share of Common Stock
|
$ | 0.40 | $ | 0.52 | $ | 0.60 | ||||||
|
Weighted
average number of shares of
|
||||||||||||
|
Common
Stock and dilutive securities:
|
||||||||||||
|
Basic
|
2,367,923 | 2,279,859 | 2,092,448 | |||||||||
|
Diluted
|
2,624,286 | 2,469,540 | 2,258,108 | |||||||||
|
(1)
|
Corporate
expense - general and administrative includes $162,060
of equity compensation for a stock award and $585,844 one-time
expense related to the reimbursement of an employees's income taxes in
connection with a stock award for the year ended December 31,
2005, $324,120 of equity compensation for a stock
award and $329,054 of stock-based compensation expense pursuant to SFAS
123 (R) for the year ended December 31, 2006 and $324,120
of equity compensation for a stock award and $405,274 of
stock-based compensation expense pursuant to SFAS 123 (R) for the year
ended December 31, 2007.
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
40 -
|
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
|
||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
|
||||||||||||||||||||
|
Common
Stock
|
Comprehensive
Income
|
Retained
Earnings
|
Shareholders'
Equity
|
|||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||
|
BALANCES,
December 31, 2004
|
2,417,020 | $ | 12,125,811 | $ | - | $ | 3,002,539 | $ | 15,128,350 | |||||||||||
|
Common
Stock options exercised
|
178,616 | 600,254 | - | - | 600,254 | |||||||||||||||
|
Purchase
and retirement of Common Stock
|
(311,961 | ) | (4,311,000 | ) | - | - | (4,311,000 | ) | ||||||||||||
|
Tax
benefit of Common Stock options exercised
|
- | 403,092 | - | - | 403,092 | |||||||||||||||
|
Dividends
declared on Common Stock
|
- | - | - | (945,712 | ) | (945,712 | ) | |||||||||||||
|
Equity
compensation grant
|
60,000 | - | - | - | - | |||||||||||||||
|
Stock
based compensation expense
|
- | 162,060 | - | - | 162,060 | |||||||||||||||
|
Net
Income, year-ended December 31, 2005
|
- | - | - | 2,164,303 | 2,164,303 | |||||||||||||||
|
BALANCES,
December 31, 2005
|
2,343,675 | $ | 8,980,217 | $ | - | $ | 4,221,130 | $ | 13,201,347 | |||||||||||
|
Common
Stock options exercised
|
93,847 | 422,552 | - | - | 422,552 | |||||||||||||||
|
Purchase
and retirement of Common Stock
|
(305,061 | ) | (6,057,538 | ) | - | - | (6,057,538 | ) | ||||||||||||
|
Tax
benefit of Common Stock options exercised
|
- | 237,217 | - | - | 237,217 | |||||||||||||||
|
Dividends
declared on Common Stock
|
- | - | - | (1,187,808 | ) | (1,187,808 | ) | |||||||||||||
|
Tender
offer expense
|
(44,273 | ) | (44,273 | ) | ||||||||||||||||
|
Stock
based compensation expense
|
- | 653,174 | - | - | 653,174 | |||||||||||||||
|
Net
Income, year-ended December 31, 2006
|
- | - | - | 2,322,974 | 2,322,974 | |||||||||||||||
|
BALANCES,
December 31, 2006
|
2,132,461 | $ | 4,191,349 | $ | - | $ | 5,356,296 | $ | 9,547,645 | |||||||||||
|
Common
Stock options exercised
|
187,770 | 1,293,925 | - | - | 1,293,925 | |||||||||||||||
|
Purchase
and retirement of Common Stock
|
(196,791 | ) | (4,141,188 | ) | - | - | (4,141,188 | ) | ||||||||||||
|
Tax
benefit of Common Stock options exercised
|
- | 955,035 | - | - | 955,035 | |||||||||||||||
|
Dividends
declared on Common Stock
|
- | - | - | (1,256,797 | ) | (1,256,797 | ) | |||||||||||||
|
Stock-based
compensation expense
|
- | 729,394 | - | - | 729,394 | |||||||||||||||
|
Other
comprehensive loss
|
(34,156 | ) | (34,156 | ) | ||||||||||||||||
|
Net
Income, year-ended December 31, 2007
|
- | - | 2,437,297 | 2,437,297 | 2,437,297 | |||||||||||||||
|
Comprehensive
Income
|
2,403,141 | |||||||||||||||||||
|
BALANCES,
December 31, 2007
|
2,123,440 | $ | 3,028,515 | $ | (34,156 | ) | $ | 6,536,796 | $ | 9,531,155 | ||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
41 -
|
BIRNER DENTAL MANAGEMENT
SERVICES, INC. AND SUBSIDIARIES
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
income
|
$ | 2,164,303 | $ | 2,322,974 | $ | 2,437,297 | ||||||
|
Adjustments
to reconcile net income to net
|
||||||||||||
|
cash
provided by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
1,842,843 | 2,323,767 | 2,652,265 | |||||||||
|
Stock
compensation expense
|
162,060 | 653,174 | 729,394 | |||||||||
|
Loss
on disposition of property
|
815 | - | - | |||||||||
|
Provision
for doubtful accounts
|
673,613 | 722,622 | 664,304 | |||||||||
|
Provision
for (benefit from) deferred income taxes
|
54,868 | (41,372 | ) | (93,487 | ) | |||||||
|
Changes
in assets and liabilities net of effects
|
||||||||||||
|
from
acquisitions:
|
||||||||||||
|
Accounts
receivable
|
(912,796 | ) | (611,175 | ) | (568,932 | ) | ||||||
|
Prepaid
expenses and other assets
|
195,072 | 8,316 | (23,082 | ) | ||||||||
|
Deferred
charges and other assets
|
5,195 | (27,615 | ) | 10,173 | ||||||||
|
Accounts
payable
|
186,386 | (416,578 | ) | 296,922 | ||||||||
|
Accrued
expenses
|
(457,761 | ) | 245,658 | (137,896 | ) | |||||||
|
Accrued
payroll and related expenses
|
168,078 | 93,892 | (140,293 | ) | ||||||||
|
Income
taxes payable/receivable
|
255,577 | (61,243 | ) | (140,833 | ) | |||||||
|
Other
long-term obligations
|
18,982 | 130,827 | (35,284 | ) | ||||||||
|
Net
cash provided by operating activities
|
4,357,235 | 5,343,247 | 5,650,548 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Capital
expenditures
|
(1,299,325 | ) | (1,251,151 | ) | (666,648 | ) | ||||||
|
Development
of new dental centers
|
(569,220 | ) | (1,961,542 | ) | (47,707 | ) | ||||||
|
Net
cash used in investing activities
|
(1,868,545 | ) | (3,212,693 | ) | (714,355 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Advances
- line of credit
|
22,022,377 | 21,298,996 | 20,101,330 | |||||||||
|
Repayments
- line of credit
|
(20,068,772 | ) | (21,100,190 | ) | (20,899,230 | ) | ||||||
|
Advances
- term loan
|
- | 4,600,000 | - | |||||||||
|
Repayments
- term loan
|
- | (230,000 | ) | (920,000 | ) | |||||||
|
Repayment
of long-term debt
|
(167,217 | ) | (145,150 | ) | (33,561 | ) | ||||||
|
Proceeds
from exercise of Common Stock options
|
600,254 | 422,552 | 1,293,925 | |||||||||
|
Purchase
and retirement of Common Stock
|
(4,311,000 | ) | (6,101,809 | ) | (4,141,188 | ) | ||||||
|
Tax
benefit of Common Stock options exercised
|
403,092 | 237,217 | 955,035 | |||||||||
|
Common
Stock cash dividends
|
(801,863 | ) | (1,145,726 | ) | (1,216,540 | ) | ||||||
|
Net
cash used in financing activities
|
(2,323,129 | ) | (2,164,110 | ) | (4,860,229 | ) | ||||||
|
NET
INCREASE (DECREASE) IN CASH AND
|
||||||||||||
|
CASH
EQUIVALENTS
|
165,561 | (33,556 | ) | 75,964 | ||||||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
756,181 | 921,742 | 888,186 | |||||||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 921,742 | $ | 888,186 | $ | 964,150 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
42 -
BIRNER DENTAL MANAGEMENT SERVICES,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
Years
Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH
|
||||||||||||
|
FLOW INFORMATION:
|
||||||||||||
|
Cash
paid during the year for interest
|
$ | 130,831 | $ | 270,427 | $ | 462,787 | ||||||
|
Cash
paid during the year for income taxes
|
$ | 576,489 | $ | 1,463,248 | $ | 931,076 | ||||||
|
NON-CASH
ITEMS:
|
||||||||||||
|
Loss
recognized on interest rate swap (net of taxes)
|
$ | - | $ | - | $ | 34,156 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
43 -
BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND
ORGANIZATION
Birner
Dental Management Services, Inc., a Colorado corporation (the ''Company''), was
incorporated in May 1995 and provides business services to dental group
practices. As of December 31, 2005, 2006 and 2007, the Company managed 57,
60 and 60 dental practices (collectively referred to as the ''Offices''),
respectively. The Company provides management services, which are designed to
improve the efficiency and profitability of the dental practices. These Offices
are organized as professional corporations and the Company provides its
management activities with the Offices under long-term management agreements
(the ''Management Agreements'').
The
Company has grown primarily through acquisitions and de novo developments. The
following table highlights the Company’s growth through December 31, 2007 as
follows:
|
Acquisitions
|
De Novo
Developments
|
Office
Consolidations/ Closings
|
|||
|
2001
and Prior
|
42
|
18
|
(6)
|
||
|
2002
|
-
|
-
|
-
|
||
|
2003
|
-
|
-
|
-
|
||
|
2004
|
-
|
2
|
(1)
|
||
|
2005
|
-
|
2
|
-
|
||
|
2006
|
-
|
4
|
(1)
|
||
|
2007
|
-
|
-
|
-
|
||
|
Total
|
42
|
26
|
(8)
|
The
Company's operations and expansion strategy are dependent, in part, on the
availability of dentists, hygienists and other professional personnel and the
ability to hire and assimilate additional management and other employees to
accommodate expanded operations.
(2)
SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation/Basis
of Consolidation
The
accompanying consolidated financial statements have been prepared on the accrual
basis of accounting. These financial statements present the financial position
and results of operations of the Company and the Offices, which are under the
control of the Company. All intercompany accounts and transactions have been
eliminated in the consolidation. Certain prior year amounts have been
reclassified to conform to the presentation used in 2007. Such
reclassification had no effect on net income.
The
Company treats Offices as consolidated subsidiaries where it has a long-term and
unilateral controlling financial interest over the assets and operations of the
Offices. The Company has obtained control of substantially all of the Offices
via the Management Agreements. The Company is a business service organization
and does not engage in the practice of dentistry or the provision of hygiene
services. These services are provided by licensed professionals. Certain key
features of these arrangements either enable the Company at any time and in its
sole discretion to cause a change in the shareholder of the P.C. (i.e.,
''nominee shareholder'') or allow the Company to vote the shares of stock held
by the owner of the P.C. and to elect a majority of the board of directors of
the P.C. The accompanying statements of income reflect net revenue,
which is the amount billed to patients, less dentists' and hygienists' wages.
Direct expenses consist of all the expenses incurred in operating the Offices
and paid by the Company. Under the Management Agreements, the Company
assumes responsibility for the management of most aspects of the Offices'
business (the Company does not engage in the practice of dentistry or the
provision of hygiene services) including personnel recruitment and training,
comprehensive administrative business and marketing support and advice, and
facilities, equipment, and support personnel as required to operate the
practice.
-
44 -
The
Emerging Issues Task Force (''EITF'') Issue 97-2 of the Financial Accounting
Standards Board (“FASB”) covers financial reporting matters relating to the
physician practice management industry, including the consolidation of
professional corporation revenue and expenses, the accounting for business
combinations and the treatment of stock options for dentists as employee
options. The Company’s accounting policies in these areas are conducted in
accordance with the provisions of EITF Issue 97-2.
Net
Revenue
“Net
revenue from consolidated dental offices” represents the ''Total dental group
practice revenue'' less amounts retained by the Offices for wages paid by the
professional corporations to dentists and hygienists. Dentists receive
compensation based upon a specified amount per hour worked or a percentage of
revenue or collections attributable to their work, and a bonus based upon the
operating performance of the Office.
A summary
of the components of net revenue for the years ended December 31, 2005, 2006,
and 2007 follows:
|
Years
Ended December 31,
|
||||||||||||
|
2005
|
2006
|
2007
|
||||||||||
|
Total
dental group practice revenue
|
$ | 52,526,276 | $ | 57,141,226 | $ | 59,390,457 | ||||||
|
Less
- amounts retained by Offices
|
15,810,159 | 17,754,230 | 18,600,202 | |||||||||
|
Net
revenue
|
$ | 36,716,117 | $ | 39,386,996 | $ | 40,790,255 | ||||||
''Total
dental group practice revenue'' represents the revenue of the consolidated and
managed Offices reported at the estimated realizable amounts from insurance
companies, preferred provider and health maintenance organizations (i.e.,
third-party payors) and patients for services rendered, net of contractual and
other adjustments, as defined in this report as Revenue. Dental services are
billed and collected by the Company in the name of the Offices.
Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. To management's knowledge, there are no material claims, disputes
or other unsettled matters that exist concerning third-party
reimbursements.
During
2005, 2006 and 2007, 10.1%, 11.4% and 12.2% respectively, of the Company's
Revenue was derived from capitated managed dental care contracts. Under these
contracts, the Offices receive a fixed monthly payment for each covered plan
member for a specific schedule of services regardless of the quantity or cost of
services provided by the Offices. Additionally, the Offices may receive co-pays
from the patient for certain services provided. Revenue from the
Company’s capitated managed dental care contracts is recognized as earned on a
monthly basis.
During
the years ended December 31, 2005, 2006 and 2007, the following companies were
responsible for the corresponding percentages of the Company’s total dental
group practice revenue (includes capitation premiums and
co-payments): Aetna Healthcare was responsible for 7.8%, 9.9% and
9.0% respectively, CIGNA Dental Health was responsible for 7.2%, 7.5% and 9.4%
respectively, and Fortis Benefits Insurance Company was responsible for 4.1%,
4.0% and 3.4% respectively.
-
45 -
Contribution From Dental
Offices
The
''Contribution from dental offices'' represents the excess of net revenue from
the operations of the Offices over direct expenses associated with operating the
Offices. The revenue and direct expense amounts relate exclusively to business
activities associated with the Offices. The contribution from dental offices
provides an indication of the level of earnings generated from the operation of
the Offices to cover corporate expenses, interest expense charges and income
taxes.
Advertising and
Marketing
The costs
of advertising, promotion and marketing are expensed as incurred.
Cash and Cash
Equivalents
For
purposes of the consolidated balance sheets and statements of cash flows, cash
and cash equivalents include money market accounts and all highly liquid
investments with original maturities of three months or less.
Accounts
Receivable
Accounts
receivable represents receivables from patients and other third-party payors for
dental services provided. Such amounts are recorded net of contractual
allowances and other adjustments at the time of billing. In those
instances when payment is not received at the time of service, the Offices
record receivables from their patients, most of who are local residents and are
insured under third-party payor agreements. In addition, the Company has
estimated allowances for uncollectible accounts. The Company’s allowance for
doubtful accounts reflects a reserve that reduces customer accounts receivable
to the net amount estimated to be collectible. Accounts are normally considered
delinquent after 120 days. However, estimating the credit-worthiness of
customers and the recoverability of customer accounts requires management to
exercise considerable judgment. In estimating uncollectible amounts,
management considers factors such as general economic and industry-specific
conditions, historical customer performance and anticipated customer
performance. Management continually monitors and periodically adjusts the
allowances associated with these receivables.
Property and
Equipment
Property
and equipment are stated at cost or fair market value at the date of
acquisition, net of accumulated depreciation. Property and equipment
are depreciated using the straight-line method over their useful lives of five
years and leasehold improvements are amortized over the remaining life of the
leases. Depreciation was $1,092,401, $1,544,473 and $1,768,893 for the years
ended December 31, 2005, 2006 and 2007, respectively.
Intangible
Assets
The
Company's dental practice acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
Offices. As part of the purchase price allocation, the Company allocates the
purchase price to the tangible and identifiable intangible assets acquired and
liabilities assumed, based on estimated fair market values. Costs of acquisition
in excess of the net estimated fair value of tangible assets acquired and
liabilities assumed are allocated to the Management Agreement. The Management
Agreement represents the Company's right to manage the Offices during the
40-year term of the agreement. The assigned value of the Management Agreement is
amortized using the straight-line method over a period of 25
years. Amortization was $750,441, $779,294 and $883,372 for the years
ended December 31, 2005, 2006 and 2007, respectively.
The
Management Agreements cannot be terminated by the related professional
corporation without cause, consisting primarily of bankruptcy or material
default by the Company.
-
46 -
Impairment of Long-Lived and
Intangible Assets
In the
event that facts and circumstances indicate that the carrying value of
long-lived and intangible assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation were required,
the estimated future undiscounted cash flows associated with the asset would be
compared to the asset’s carrying amount to determine if a write-down to market
value or discounted cash flow value would be required. As of December
31, 2007 the Company determined that intangible assets associated with one
Office should be written down approximately $104,000. This amount was
determined by comparing the intangible asset and property and equipment value at
the Office to an independent appraised value for that Office. As a
result, the Company recognized an impairment charge of $104,000 with
amortization expense in December 2007.
Concentrations of Credit
Risk
Financial
instruments, which potentially subject the Company to concentration of credit
risk, are primarily cash and cash equivalents and accounts
receivable. The Company maintains its cash balances in the form of
bank demand deposits and money market accounts with financial institutions that
management believes are creditworthy. The Company may be exposed to
credit risk generally associated with healthcare and retail
companies. The Company established an allowance for uncollectible
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other information. The Company has no
significant financial instruments with off-balance sheet risk of accounting
loss, such as foreign exchange contracts, option contracts or other foreign
currency hedging arrangements.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period.
The
application of accounting policies requires the use of judgment and
estimates. As it relates to the Company, estimates and forecasts are
required to determine any impairment of assets, allowances for bad debts,
deferred tax asset valuation reserves, if any, deferred revenue and employee
benefit-related liabilities.
These
matters that are subject to judgments and estimation are inherently uncertain,
and different amounts could be reported using different assumptions and
estimates. Management uses its best estimates and judgments in
determining the appropriate amount to reflect in the financial statements, using
historical experience and all available information. The Company also
uses outside experts where appropriate. The Company applies
estimation methodologies consistently from year to year.
Income
Taxes
The
Company accounts for income taxes (Note 9) pursuant to Statement of Financial
Accounting Standards (''SFAS'') No. 109, ''Accounting for Income Taxes,'' which
requires the use of the asset and liability method of computing deferred income
taxes. The objective of the asset and liability method is to establish deferred
tax assets and liabilities for the temporary differences between the book basis
and the tax basis of the Company's assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or
settled.
-
47 -
Earnings Per
Share
The
Company has adopted SFAS No. 128, which establishes standards for computing and
presenting earnings per share (“EPS”) for entities with publicly held common
stock. The standard requires presentation of two categories of EPS –
basic EPS and diluted EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the year. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue Common Stock were exercised or converted into Common Stock or
resulted in the issuance of Common Stock that then shared in the earnings of the
Company.
|
Years
Ended December 31,
|
||||||||||||||||||||||||||||
|
|
|
2005
|
2006
|
2007
|
||||||||||||||||||||||||
|
Income
|
Weighted Average Shares |
Per Share Amount |
Income
|
Weighted Average Shares |
Per Share Amount |
Income
|
Weighted Average Shares |
Per Share Amount |
||||||||||||||||||||
|
Basic EPS:
|
||||||||||||||||||||||||||||
|
Net
income
|
$
|
2,164,303
|
2,367,923
|
$
|
.91
|
$
|
2,322,974
|
2,279,859
|
$
|
1.02
|
$
|
2,437,297
|
2,092,448
|
$
|
1.16
|
|||||||||||||
|
Diluted
EPS:
|
||||||||||||||||||||||||||||
|
Net
income
|
$
|
2,164,303
|
2,624,286
|
$
|
.82
|
$
|
2,322,974
|
2,469,540
|
$
|
.94
|
$
|
2,437,297
|
2,558,108
|
$
|
1.08
|
|||||||||||||
The difference between basic earnings per share and diluted earnings per share for the years ended December 31, 2005, 2006 and 2007 relates to the effect of 256,363, 189,681 and 165,660 respectively, of dilutive shares of Common Stock from stock options and warrants which are included in total shares for the diluted calculation determined under the treasury stock method as prescribed by SFAS 128. For the years ended December 31, 2006 and 2007, options to purchase 85,500 and 13,700 shares, respectively, of the Company’s Common Stock were not included in the computation of dilutive income per share because their effect was anti-dilutive. Basic and diluted EPS amounts have been adjusted to reflect the 2-for-1 stock split, effective August 1, 2005.
Comprehensive
Income
The FASB
issued SFAS 130 “Reporting Comprehensive Income” in June 1997 which established
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. In addition to
net income, comprehensive income includes all changes in equity during a period,
except those resulting from investments by and distributions to
owners. For 2005 and 2006 net income and comprehensive income were
the same. In 2007, the Company recognized, on its balance sheet,
approximately $34,000 (net of taxes) of other comprehensive loss to record the
fair value of the Company’s interest rate swap designated as a cash flow
hedge. The Company recognized approximately $21,000 in tax benefit
from the loss in December 2007.
Costs of Start-up
Activities
Start-up
costs and organization costs are expensed as they are incurred.
Segment
Reporting
The
Company operates in one business segment, which is to provide business services
to dental practices. The Company currently provides business services
to Offices in the states of Arizona, Colorado and New Mexico. All
aspects of the Company’s business are structured on a practice-by-practice
basis. Financial analysis and operational decisions are made at the
individual Office level. The Company does not evaluate performance
criteria based upon geographic location, type of service offered or source of
revenue.
-
48 -
Stock-Based Compensation
Plans
On
January 1, 2006, the Company adopted SFAS. 123(R). This standard revises SFAS
123, “Accounting for Stock-Based Compensation” and supersedes Accounting
Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees.”
Under SFAS 123(R), the Company is required to measure the cost of employee
services received in exchange for stock options and similar awards
based on the grant date fair value of the award and recognize this cost in the
income statement over the period during which an employee is required to provide
service in exchange for the award.
The
Company adopted SFAS 123(R) using the modified prospective method. Under this
transition method, stock-based compensation expense for the years ended December
31, 2006 and 2007 includes: (i) compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provision of SFAS 123; and (ii) compensation expense for all stock-based
compensation awards granted subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provision of SFAS 123(R). The
Company recognizes compensation expense on a straight line basis over the
requisite service period of the award. Total stock-based compensation expense
included in the Company’s statement of income for the years ended December 31,
2006 and 2007 was approximately $329,000 and $405,000, respectively. Total
stock-based compensation expense was recorded as a component of corporate
general and administrative expense. In accordance with the modified prospective
method, financial results for prior periods have not been restated.
The
Black-Scholes option-pricing model was used to estimate the option fair values.
The option-pricing model requires a number of assumptions, of which the most
significant are expected stock price volatility, the expected pre-vesting
forfeiture rate, expected dividend rate and the expected option term (the amount
of time from the grant date until the options are exercised or expire).
Expected volatility was calculated based upon actual historical stock price
movements over the most recent periods ending December 31, 2007 equal to the
expected option term. Expected pre-vesting forfeitures were estimated based on
actual historical pre-vesting forfeitures over the most recent periods ending
December 31, 2007 for the expected option term. The expected option term was
calculated using the “simplified” method permitted by Staff Accounting Bulletin
107.
Prior to
January 1, 2006, the Company accounted for stock options using the intrinsic
value method wherein compensation expense is recognized on stock options granted
only for the excess of the market price of the Company’s Common Stock over the
option exercise price on the date of grant. All options of the Company are
granted at amounts equal to or higher than the fair value of the Common Stock,
so no compensation expense is recorded.
-
49 -
If the
Company had accounted for its stock-based compensation plans in accordance with
SFAS No. 123, the Company's net income and net income per share of Common Stock
for the year ended December 31, 2005 would have been reported as
follows:
|
2005
|
||||||
|
Net
income:
|
||||||
|
As
reported
|
$ | 2,164,303 | ||||
|
Stock
based compensation included in net income
|
- | |||||
|
Fair
value of stock based compensation,
|
||||||
|
net
of income taxes
|
(222,701 | ) | ||||
|
Pro
forma
|
$ | 1,941,602 | ||||
|
Net
income per share, basic:
|
||||||
|
As
reported
|
$ | 0.91 | ||||
|
Stock
based compensation included in net income
|
- | |||||
|
Fair
value of stock based compensation,
|
||||||
|
net
of income taxes
|
(0.09 | ) | ||||
|
Pro
forma
|
$ | 0.82 | ||||
|
Net
income per share, diluted:
|
||||||
|
As
reported
|
$ | 0.82 | ||||
|
Stock
based compensation included in net income
|
- | |||||
|
Fair
value of stock based compensation,
|
||||||
|
net
of income taxes
|
(0.08 | ) | ||||
|
Pro
forma
|
$ | 0.74 | ||||
Pro forma
compensation expense under SFAS 123, among other computational differences, does
not consider potential pre-vesting forfeitures. Because of these differences,
the pro forma stock compensation expense presented above for the year ended
December 31, 2005 under SFAS 123 and the stock compensation expense recognized
during the years ended December 31, 2006 and 2007 under SFAS 123(R) are not
directly comparable. In accordance with the modified prospective transition
method of SFAS 123(R), the 2005 results have not been restated.
Recent Accounting
Pronouncements
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
regarding the process of quantifying financial statement misstatements and the
potential under current practice for the build up of improper amounts on the
balance sheet. The Company has adopted the bulletin during 2006. The adoption
did not have a material effect on the Company’s consolidated financial
statements.
In
September 2006, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS
No. 157”), to establish a consistent framework for measuring fair value and
expand disclosures on fair value measurements. The provisions of SFAS
No. 157 are effective beginning in our fiscal year 2008 and are currently
not expected to have a material effect on the Company’s consolidated financial
statements.
In
February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No.
159 permits companies to elect to follow fair value accounting for certain
financial assets and liabilities in an effort to mitigate volatility in earnings
without having to apply complex hedge accounting provisions. The
standard also establishes presentation and disclosure requirements designed to
facilitate comparison between entities that choose different measurement
attributes for similar types of assets and liabilities. The
provisions of SFAS No. 159 are effective beginning in our fiscal year 2008 and
are currently not expected to have a material effect on the Company’s
consolidated financial statements.
-
50 -
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141R, Business Combinations, and
Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No.
51. These new standards significantly change the accounting for and
reporting of business combination transactions and noncontrolling interests
(previously referred to minority interests) in consolidated financial
statements. These statements are effective for the Company beginning
on January 1, 2009. The Company is currently evaluating the
provisions of FAS 141(R) and FAS 160.
Reclassifications
Certain
reclassifications have been made to the 2005 and 2006 financial statement
presentation to conform to the 2007 presentation. These
reclassifications had no effect on net income as previously stated.
(3) ACQUISITIONS
With each
Office acquisition, the Company enters into a contractual arrangement, including
a Management Agreement, which has a term of 40 years. Pursuant to these
contractual arrangements the Company provides all business and marketing
services at the Offices, other than the provision of dental services, and
believes it has long-term and unilateral control over the assets and business
operations of each Office. Accordingly, acquisitions are considered business
combinations and treated under the purchase method of accounting. The Company
has not completed any acquisitions since October 1, 2002.
(4) PROPERTY AND
EQUIPMENT
Property and equipment consist of the
following:
|
December
31,
|
||||||||||
|
2006
|
2007
|
|||||||||
|
Dental
equipment
|
$ | 6,404,663 | $ | 6,172,799 | ||||||
|
Furniture
and fixtures
|
1,270,669 | 1,211,575 | ||||||||
|
Leasehold
improvements
|
7,467,332 | 7,643,717 | ||||||||
|
Computer
equipment, software and related items
|
2,106,081 | 2,000,916 | ||||||||
|
Instruments
|
782,930 | 881,162 | ||||||||
| 18,031,675 | 17,910,169 | |||||||||
|
Less
- accumulated depreciation
|
(12,439,003 | ) | (13,376,638 | ) | ||||||
|
Property
and equipment, net
|
$ | 5,592,672 | $ | 4,533,531 | ||||||
Depreciation expense was $1,092,401, $1,544,473 and $1,768,893
for the years ended December 31, 2005, 2006 and 2007,
respectively.
-
51 -
(5) INTANGIBLE
ASSETS
Intangible
assets consist of Management Agreements:
|
Amortization
|
December
31,
|
||||||||||
|
Period
|
2006
|
2007
|
|||||||||
|
Management
agreements
|
25
years
|
$ | 18,723,623 | $ | 18,731,957 | ||||||
|
Less
- accumulated amortization
|
(6,451,265 | ) | (7,338,367 | ) | |||||||
|
Intangible
assets, net
|
$ | 12,272,358 | $ | 11,393,590 | |||||||
Amortization
expense was $750,441, $779,294 and $883,372 for the years ended December 31,
2005, 2006 and 2007, respectively.
The
estimated aggregate amortization expense on the Management Agreements for each
of the five succeeding fiscal years is as follows:
|
2008
|
$
|
780,033
|
||||
|
2009
|
|
780,033
|
||||
|
2010
|
780,033
|
|||||
|
2011
|
780,033
|
|||||
|
2012
|
780,033
|
|||||
|
$
|
3,900,165
|
-
52 -
(6) DEBT
Debt
consists of the following:
|
December
31,
|
||||||||
|
2006
|
2007
|
|||||||
|
Revolving
credit agreement with a bank not to exceed
|
||||||||
|
$7.0
million, at either, or a combination of, lender’s
|
||||||||
|
Base
Rate (8.25% at December 31, 2006) or a LIBOR rate
|
||||||||
|
Plus
1.50% (6.85% at December 31, 2006), collateralized by the
|
||||||||
|
Company’s
accounts receivable and Management Agreements, due in
|
||||||||
|
May
2008.
|
3,052,411 | - | ||||||
|
Revolving
credit agreement with a bank not to exceed
|
||||||||
|
$7.0
million, at either, or a combination of, lender’s
|
||||||||
|
Base
Rate (7.25% at December 31, 2007) or a LIBOR rate
|
||||||||
|
Plus
1.25% (6.5% at December 31, 2007), collateralized by the
|
||||||||
|
Company’s
accounts receivable and Management Agreements, due in
|
||||||||
|
May
2009.
|
- | 2,254,511 | ||||||
|
$4.6
Term Loan with a bank, $2.3 was borrowed at a fixed rate of
7.05%
|
||||||||
|
and
the remaining was borrowed at a floating intereste rate of
|
||||||||
|
LIBOR
plus 1.5% (6.65% at December 31, 2007), the principal is
paid
|
||||||||
|
back
in 20 equal quarterly payments of approximately $230,000
plus
|
||||||||
|
interest
beginning December 31, 2006, collateralized by the
|
||||||||
|
Company’s
accounts receivable and Management Agreements,
|
||||||||
|
matures
on September 30, 2011.
|
4,370,000 | 3,450,000 | ||||||
|
Acquisition
notes payable:
|
||||||||
|
Due
in March 2007, interest at 8%, no collateral, monthly principal
and
|
||||||||
|
interest
payments of $11,335.
|
33,561 | - | ||||||
| $ | 7,455,972 | $ | 5,704,511 | |||||
|
Less
- current maturities
|
(953,561 | ) | (920,000 | ) | ||||
|
Long-term
debt, net of current maturities
|
$ | 6,502,411 | $ | 4,784,511 | ||||
-
53 -
Credit
Facility
On April
30, 2007, the Company amended its Credit Facility. The Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $7.0 million at either, or a combination of, the
lender’s Base Rate or at a LIBOR rate plus a LIBOR Rate Margin, at the Company’s
option. The lender’s Base Rate computes interest at the higher of the
lender’s “prime rate” or the Federal Funds Rate plus one-half percent (0.5%).
The LIBOR option computes interest at the LIBOR Rate as of the date such LIBOR
Rate loan was made plus a LIBOR Rate Margin of 1.25%. A commitment fee of 0.25%
on the average daily unused amount of the revolving loan commitment during the
preceding quarter will also be assessed. The Company may prepay any
Base Rate Loan at any time and any LIBOR Rate Loan upon not less than three
business days prior written notice given to the lender, but the Company will be
responsible for any loss or cost incurred by the lender in liquidating or
employing deposits required to fund or maintain the LIBOR Rate
loan. The Credit Facility expires on May 31, 2009. At December 31,
2007, the Company had $2.3 million outstanding and $4.7 million available for
borrowing under the revolving loan. This consisted of $955,000 outstanding under
the Base Rate Option and $1.3 million outstanding under the LIBOR Rate option.
The Credit Facility requires the Company to maintain certain financial ratios on
an ongoing basis. At December 31, 2007, the Company was in full
compliance with all of its covenants under this agreement.
Term
Loan
On
October 5, 2006, the Company accepted for payment, at a purchase price of $21.75
per share, 212,396 shares of its Common Stock that were properly tendered and
not withdrawn pursuant to the Company’s “dutch auction” tender offer. The
212,396 shares purchased were comprised of the 175,000 shares the Company
offered to purchase and 37,396 shares that were purchased pursuant to the
Company's right to purchase up to an additional 2% of the outstanding shares as
of August 31, 2006, without extending the tender offer in accordance with
applicable securities laws. These shares represented approximately 9.2% of the
shares outstanding as of September 30, 2006. The tender offer was funded from a
$4.6 million Term Loan. Under the Term Loan, $2.3 million was borrowed at a
fixed interest rate of 7.05% and the remaining $2.3 million was borrowed at a
floating interest rate of Libor plus 1.5%. The principal amount borrowed will be
paid quarterly in 20 equal payments of approximately $230,000 plus interest
beginning December 31, 2006. At December 31, 2007, the Company had $3.5
million outstanding under the Term Loan. The Term Loan matures on September
30, 2011. At December 31, 2007, the Company was in full compliance with all of
its covenants under the Term Loan.
The Term
Loan is a fixed-for-floating interest rate swap. The Company has elected to
designate it as a cash flow hedge under SFAS No. 133.
The
scheduled maturities of debt are as follows:
|
Year
|
Amount
|
|||||
|
|
||||||
|
2008
|
|
920,000 | ||||
|
2009
|
3,174,511 | |||||
|
2010
|
920,000 | |||||
|
2011
|
690,000 | |||||
| $ | 5,704,511 | |||||
-
54 -
(7) SHAREHOLDERS'
EQUITY
Treasury
Stock
The
Company from time to time may purchase its Common Stock on the open market. The
shares purchased and the purchase prices per share for transactions prior to
August 1, 2005 have been adjusted to reflect the 2-for-1 stock
split. During 2005, the Company, in 40 separate transactions,
purchased 311,961 shares of its Common Stock for total consideration of
approximately $4.3 million at prices ranging from $9.00 to $19.31 per share.
During 2006, the Company, in 67 separate transactions, purchased 305,161 shares
of its Common Stock for total consideration of approximately $6.1 million at
prices ranging from $15.00 to $21.75 per share. In April 2006, the Company
purchased 54,250 shares through a private transaction that was approved by the
Board of Directors. On October 5, 2006, the Company purchased, through a Board
of Directors approved Dutch Auction tender offer, 212,396 shares of its Common
Stock at $21.75 for total consideration of $4.6 million. During 2007, the
Company, in 27 separate transactions, purchased 196,791 shares of its Common
Stock for a total consideration of approximately $4.1 million at prices ranging
from $18.50 to $24.33 per share. In August 2007, the Company purchased 100,000
shares at $20.75 per share in a private transaction that was approved by the
Board of Directors. In December 2007, the Company purchased 49,204
shares at $21.00 per share in a private transaction that was approved by the
Board of Directors. As of December 31, 2007, approximately $174,000
of the previously authorized amount was available for open market
purchases. On January 23, 2008, the Company announced that the Board
of Directors had approved an increase in the authorized amount up to $1 million
of stock repurchases.
Stock-Based Compensation
Plans
At the
Company’s June 2005 annual meeting of shareholders, the shareholders approved
the 2005 Equity Incentive Plan (“2005 Plan”). The 2005 Plan was
amended at the June 2007 annual meeting of shareholders to reserve 425,000
shares of Common Stock for issuance. The 2005 Plan provides for the
grant of incentive stock options, restricted stock, restricted stock units and
stock grants to employees (including officers and employee-directors) and
non-statutory stock options to employees, directors and consultants. The
objectives of this plan include attracting and retaining the best personnel,
providing for additional performance incentives by providing employees with the
opportunity to acquire Common Stock. As of December 31, 2007, there were 159,966
shares available for issuance under the 2005 Plan. The exercise price of the
stock options issued under the 2005 Plan is equal to the market price, or market
price plus 10% for shareholders who own greater than 10% of the Company, at the
date of grant. These stock options expire seven years, or five years for
shareholders who own greater than 10% of the Company, from the date of the grant
and vest annually over a service period ranging from three to five years. The
2005 Plan is administered by a committee of two or more outside directors from
the Company’s Board of Directors (the “Committee”). The Committee determines the
eligible individuals to whom awards under the 2005 Plan may be granted, as well
as the time or times at which awards will be granted, the number of shares to be
granted to any eligible individual, the life of any award, and any other terms
and conditions of the awards in addition to those contained in the 2005 Plan. As
of December 31, 2007, there were 70,688 vested options outstanding and 128,778
unvested options, 40,000 vested restricted shares and 20,000 unvested restricted
shares outstanding under the 2005 Plan.
The
Employee Stock Option Plan (the ''Employee Plan'') was adopted by the Board of
Directors effective as of October 30, 1995, and as amended on September 4, 1997,
February 28, 2002, and June 8, 2004, reserved 479,250 shares of Common Stock for
issuance. The Employee Plan provided for the grant of incentive stock options to
employees (including officers and employee-directors) and non-statutory stock
options to employees, directors and consultants. The Employee Plan expired by
its terms on October 30, 2005. As of December 31, 2007, there were 143,000
vested options and 34,667 unvested options outstanding under the Employee
Plan.
The
Dental Center Stock Option Plan (“Dental Center Plan”) was adopted by the Board
of Directors effective as of October 30, 1995, and as amended on September 4,
1997, reserved 160,475 shares of Common Stock for issuance. The Dental Center
Plan provided for the grant of non-statutory stock options to professional
corporations that operate the Offices (“P.C.s”) that are parties to Management
Agreements with the Company, and to dentists or dental hygienists who are either
employed by or are an owner of the P.C.s. The Dental Center Plan expired by its
terms on October 30, 2005. As of December 31, 2007, there were no vested or
unvested options outstanding under the Dental Center Plan.
-
55 -
The
Company uses the Black-Scholes pricing model to estimate the fair value of each
option granted with the following weighted average assumptions:
|
For
years ended December 31,
|
||||||
|
Valuation
Assumptions
|
2005
|
2006
|
2007
|
|||
|
Expected
life (1)
|
3.9
|
5.0
|
4.5
|
|||
|
Risk-free
interest rate (2)
|
3.95%
|
4.76%
|
4.71%
|
|||
|
Expected
volatility (3)
|
45%
|
53%
|
58%
|
|||
|
Expected
dividend yield
|
2.49%
|
2.86%
|
3.07%
|
|||
|
Expected
forfeiture (4)
|
N/A
|
5.09%
|
5.37%
|
|||
_____________________________
|
(1)
|
The
expected life, in years, of stock options is estimated using the
simplified-method calculation.
|
|
(2)
|
The
risk-free interest rate is based on U.S. Treasury bills whose term is
consistent with the expected life of the stock
options.
|
|
(3)
|
The
expected volatility is estimated based on historical and current stock
price data for the Company.
|
|
(4)
|
Beginning
on the date of adoption of SFAS 123(R), January 1, 2006, forfeitures are
estimated based on historical experience. Prior to the adoption
of SFAS 123(R), forfeitures were recorded as they
occurred.
|
A summary
of stock option activity as of December 31, 2005, 2006 and 2007, and changes
during the years then ended, are presented below:
|
Number
of Options/ Warrants
|
Weighted-Average
Exercise Price
|
Range
of Exercise Prices
|
Weighted-Average
Remaining Contractual Term (years)
|
Aggregate
Intrinsic Value
(thousands)
|
||||||
|
Balance
at December 31, 2004
|
527,414
|
$ 5.11
|
$ 1.00
- $17.50
|
3.0
|
$ 2,550
|
|||||
|
Granted
|
382,000
|
$ 14.30
|
$ 9.66
- $19.37
|
|
||||||
|
Exercised
|
178,616
|
$ 3.36
|
$ 1.00
- $ 7.50
|
|
||||||
|
Forfeited
|
75,416
|
$ 9.69
|
$ 5.50
- $17.50
|
|
||||||
|
|
|
|
||||||||
|
Balance
at December 31, 2005
|
655,382
|
$ 10.42
|
$ 1.00
- $19.37
|
4.2
|
$ 6,828
|
|||||
|
Granted
|
49,700
|
$ 17.49
|
$14.81
- $19.75
|
|
||||||
|
Exercised
|
93,847
|
$ 4.50
|
$ 1.00
- $13.00
|
|
||||||
|
Canceled
|
48,000
|
$ 15.10
|
$12.50
- $17.61
|
|
||||||
|
|
|
|
||||||||
|
Balance
at December 31, 2006
|
563,235
|
$ 11.63
|
$ 4.80
- $19.75
|
3.7
|
$ 6,550
|
|||||
|
Granted
|
20,000
|
$ 21.49
|
$19.50
- $21.85
|
|
||||||
|
Exercised
|
187,769
|
$ 6.89
|
$ 4.80
- $17.61
|
|
||||||
|
Canceled
|
18,333
|
$ 14.74
|
$ 9.66
- $17.61
|
|
||||||
|
|
|
|
||||||||
|
Balance
at December 31, 2007
|
377,133
|
$ 14.36
|
$ 5.50
- $21.85
|
3.7
|
$ 2,677
|
|||||
|
|
|
|
||||||||
|
Exercisable
at December 31, 2005
|
357,382
|
$ 6.29
|
$ 1.00
- $ 9.75
|
2.5
|
$ 2,250
|
|||||
|
|
|
|
||||||||
|
Exercisable
at December 31, 2006
|
304,870
|
$ 7.95
|
$ 4.80
- $19.37
|
2.1
|
$ 2,425
|
|||||
|
|
|
|
||||||||
|
Exercisable
at December 31, 2007
|
213,688
|
$ 12.25
|
$ 5.50
- $19.75
|
2.8
|
$ 1,963
|
|||||
-
56 -
The
weighted average grant date fair value of options granted was $9.02, $7.00 and
$4.67 per option during the years ended December 31, 2007, 2006 and 2005,
respectively. Net cash proceeds from the exercise of stock options
during the years ended December 31, 2007, 2006 and 2005 were $1,294,000,
$423,000 and $600,000, respectively. The associated income tax benefit from
stock options exercised during the year ended December 31, 2007, 2006 and 2005,
respectively was $955,000, $237,000 and $403,000, respectively. As of
the date of exercise, the total intrinsic value of options exercised during the
years ended December 31, 2007, 2006 and 2005 was $2.7 million, $1.3 million and
$2.0 million, respectively. As of December 31, 2007, there was $1.1 million of
total unrecognized compensation expense related to non-vested stock options,
which is expected to be recognized over a weighted average period of 1.1
years.
The
following table summarizes information about the options outstanding at December
31, 2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||
|
Range
of Exercise Prices
|
Number
of Options Outstanding at December 31, 2007
|
Weighted
Average Remaining Contractual Life
|
Weighted
Average
Exercise
Price
|
Number
of Options Exercisable at December 31, 2007
|
Weighted
Average
Exercise
Price
|
|||||
|
$ 4.37
— 6.55
|
6,000
|
1.0
|
$ 5.50
|
6,000
|
$ 5.50
|
|||||
|
6.56 — 8.74
|
54,000
|
1.6
|
7.88
|
54,000
|
7.88
|
|||||
|
8.75 — 10.92
|
78,667
|
2.6
|
9.73
|
72,000
|
9.73
|
|||||
|
10.93
— 13.11
|
39,000
|
4.3
|
12.50
|
11,000
|
12.50
|
|||||
|
13.12
— 15.30
|
15,016
|
5.5
|
14.89
|
3,684
|
14.91
|
|||||
|
17.48
— 19.66
|
164,450
|
4.4
|
18.55
|
66,004
|
18.90
|
|||||
|
19.67
— 21.85
|
20,000
|
6.1
|
21.53
|
1,000
|
19.75
|
|||||
|
$ 4.37
— 21.85
|
377,133
|
3.7
|
$ 14.36
|
213,688
|
$ 12.25
|
|||||
Restricted
Stock
On July
1, 2005, the Company granted 60,000 shares of restricted Common Stock to the
Company’s Chairman and Chief Executive Officer (the “Employee”). In connection
with the grant of restricted stock, the Company agreed to reimburse the Employee
an amount equal to the tax liability associated with the grant. Such
reimbursement was made by the Company and totaled approximately $586,000 which
was recognized as an expense during the third quarter of 2005. As of December
31, 2007, all of the compensation expense related to the restricted stock grant
has been recognized. Beginning June 30, 2007, the Company reclassified deferred
equity compensation to Common Stock.
A summary
of the vesting status of the shares of restricted stock as of December 31, 2006
and 2007, and the changes during the 12 months then ended, is presented
below:
- 57
-
|
Number
of Restricted Stock Shares
|
Weighted-Average
Grant-Date Fair Value
|
||||||||
|
Non-vested
at December 31, 2005
|
60,000 | $ | 13.51 | ||||||
|
Granted
|
- | - | |||||||
|
Vested
|
(20,000 | ) | 13.51 | ||||||
|
Forfeited
|
- | - | |||||||
|
Non-vested
at December 31, 2006
|
40,000 | 13.51 | |||||||
|
Granted
|
- | - | |||||||
|
Vested
|
(20,000 | ) | 13.51 | ||||||
|
Forfeited
|
- | - | |||||||
|
Non-vested
at December 31, 2007
|
20,000 | $ | 13.51 | ||||||
(8) COMMITMENTS AND
CONTINGENCIES
Operating Lease
Obligations
The
Company leases office space under leases accounted for as operating leases. The
original lease terms are generally one to five years with options to renew the
leases for specific periods subsequent to their original terms. Rent expense for
these leases totaled $2,993,959, $3,378,072 and $3,697,399 for the years ended
December 31, 2005, 2006, and 2007, respectively.
Future
minimum lease commitments for operating leases with remaining terms of one or
more years are as follows:
|
Years ending, December 31,
|
|||||
|
2008
|
$ | 2,715,002 | |||
|
2009
|
2,247,433 | ||||
|
2010
|
1,631,048 | ||||
|
2011
|
792,474 | ||||
|
2012
|
431,748 | ||||
|
Thereafter
|
57,805 | ||||
| $ | 7,875,510 | ||||
Certain of the Company’s office space leases are structured to include
scheduled and specified rent increases over the lease term. From time
to time the Company receives incentives from the landlord including tenant
improvement discounts and periods of free rent. The Company has
recognized the effects of these rent escalations, tenant improvement discounts
and periods of free rent on a straight-line basis over the lease
terms.
Litigation
From time
to time the Company is subject to litigation incidental to its business, which
could include litigation as a result of the dental services provided at the
Offices, although the Company does not engage in the practice of dentistry or
control the practice of dentistry. The Company maintains general liability
insurance for itself and provides for professional liability insurance to the
dentists, dental hygienists and dental assistants at the Offices. Management
believes the Company is not presently a party to any material
litigation.
-
58 -
(9) INCOME
TAXES
The
Company accounts for income taxes through recognition of deferred tax assets and
liabilities for the expected future income tax consequences of events, which
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Income
tax expense for the years ended December 31 consists of the
following:
|
2005
|
2006
|
2007
|
||||||||||||
|
Current:
|
||||||||||||||
|
Federal
|
$ | 1,069,508 | $ | 1,455,771 | $ | 1,737,943 | ||||||||
|
State
|
120,604 | 183,135 | 130,503 | |||||||||||
| 1,190,112 | 1,638,906 | 1,868,446 | ||||||||||||
|
Deferred:
|
||||||||||||||
|
Federal
|
52,095 | (34,400 | ) | (190,224 | ) | |||||||||
|
State
|
2,753 | (7,721 | ) | (26,430 | ) | |||||||||
| 54,848 | (42,121 | ) | (216,654 | ) | ||||||||||
|
Total
income tax expense
|
$ | 1,244,960 | $ | 1,596,785 | $ | 1,651,792 | ||||||||
The
Company's effective tax rate differs from the statutory rate due to the impact
of the following (expressed as a percentage of income before income
taxes):
|
2005
|
2006
|
2007
|
||||||||||||
|
Statutory
federal income tax
|
||||||||||||||
|
expense
|
34.0 | % | 34.0 | % | 34.0 | % | ||||||||
|
State
income tax expense
|
3.0 | 4.0 | 3.5 | |||||||||||
|
Effect
of permanent differences -
|
||||||||||||||
|
Travel
and entertainment expenses
|
0.5 | 0.4 | 0.3 | |||||||||||
|
Share
based compensation
|
- | 3.0 | 2.9 | |||||||||||
|
Other
|
(1.0 | ) | (0.7 | ) | (0.3 | ) | ||||||||
| 36.5 | % | 40.7 | % | 40.4 | % | |||||||||
-
59 -
Temporary
differences comprise the deferred tax assets and liabilities in the consolidated
balance sheet as follows:
|
December 31,
|
||||||||||
|
2006
|
2007
|
|||||||||
|
Deferred
tax assets current:
|
||||||||||
|
Accruals
not currently deductible
|
$ | 76,036 | $ | 67,989 | ||||||
|
Allowance
for doubtful accounts
|
109,635 | 110,602 | ||||||||
| 185,671 | 178,591 | |||||||||
|
Deferred
tax assets long-term:
|
||||||||||
|
Depreciation
for tax under books
|
930,761 | 1,142,406 | ||||||||
| 930,761 | 1,142,406 | |||||||||
|
Deferred
tax liabilities long-term:
|
||||||||||
|
Intangible
asset amortization for tax
|
||||||||||
|
over
books
|
(1,664,995 | ) | (1,776,073 | ) | ||||||
| (1,664,995 | ) | (1,776,073 | ) | |||||||
|
Net
deferred tax asset (liability)
|
$ | (548,563 | ) | $ | (455,076 | ) | ||||
Deferred
income taxes are recognized for the expected tax consequences in future years
for differences between the tax bases of assets and liabilities and their
financial reporting amounts, based upon enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. The Company’s significant deferred tax assets are related to:
Accruals not currently deductible, allowance for doubtful accounts and
depreciation expense for tax which is less than depreciation expense for
books. The Company has not established a valuation allowance to
reduce deferred tax assets as the Company expects to fully recover these amounts
in future periods. The Company’s significant deferred tax liability is the
result of intangible asset amortization expense for tax being greater than the
intangible asset amortization expense for books. Management reviews and adjusts
those estimates annually based upon the most current information
available. However, because the recoverability of deferred taxes is
directly dependent upon the future operating results of the Company, actual
recoverability of deferred taxes may differ materially from management’s
estimates.
In
2005, 2006 and 2007, tax benefits associated with the exercise of stock options
reduced taxes payable by approximately $403,000, $237,000 and $955,000,
respectively, and increased equity by the same amount.
The
Company is aware of the risk that the recorded deferred tax assets may not be
realizable. However, management believes that it will obtain the full
benefit of the deferred tax assets on the basis of its evaluation of the
Company’s anticipated profitability over the period of years that the temporary
differences are expected to become tax deductions. It believes that
sufficient book and taxable income will be generated to realize the benefit of
these tax assets.
Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a company’s financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.
FIN 48 requires a company to determine whether it is more likely than not
that a tax position will be sustained upon examination based upon the technical
merits of the position. If the more-likely-than-not threshold is not met, a
company must measure the tax position to determine the amount to recognize in
the financial statements. The application of income tax law and regulations is
inherently complex and subject to change. The Company is required to make many
subjective assumptions and judgments regarding the income tax exposures. Changes
in these subjective assumptions and judgments can materially affect amounts
recognized in the Company’s financial statements.
At the
adoption date of January 1, 2007 and at December 31, 2007, the Company had
no unrecognized tax benefits which would affect the effective tax rate if
recognized, and as of December 31, 2007, the Company had no accrued interest or
penalties related to uncertain tax positions.
-
60 -
On
initial application, FIN 48 was applied to all tax positions for which the
statute of limitations remained open. The tax years 2004-2007 remain open to
examination by taxing jurisdictions to which the Company is subject. The IRS
report issued in July 2006 made no changes to the Company’s federal income tax
return for 2004. No other federal or state exams are ongoing or have been
performed in the past three years.
(10)
BENEFIT
PLANS
Profit Sharing 401(k)/Stock
Bonus Plan
The
Company has a 401(k)/stock bonus plan, which was established April 1, 1997.
Eligible employees may make voluntary contributions to the plan. Effective
November 1, 2005, the Company announced that it would start matching 20% of the
first 6% of each employee’s contribution. Effective April 1, 2007,
the Company announced that it would increase this match to 40% of the first 6%
of each employee’s contribution. The Company contributed $10,000,
$89,000 and $191,000 towards the plan for the years ended December 31, 2005,
2006 and 2007, respectively. In addition, the Company may make profit
sharing contributions during certain years, which may be made, at the Company's
discretion, in cash or in Common Stock of the Company. For the years ended
December 31, 2005, 2006 and 2007 the Company did not make any profit sharing
contributions.
Other Company
Benefits
The
Company provides a health and welfare benefit plan to all regular full-time
employees. The plan includes health and life insurance, and a cafeteria plan. In
addition, regular full-time and regular part-time employees are entitled to
certain dental benefits.
(11) DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS
SFAS No.
107, ''Disclosures About Fair Value of Financial Instruments,'' requires
disclosure about the fair value of financial instruments. Carrying amounts for
all financial instruments included in current assets and current liabilities
approximate estimated fair values due to the short maturity of those
instruments. The fair values of the Company's note payable are based on similar
rates currently available to the Company. The carrying values and estimated fair
values were estimated to be substantially the same at December 31,
2006. As of December 31, 2007, the Company has recognized, on its
balance sheet, approximately $34,000 (net of taxes) of other comprehensive loss
to mark down the value of the Company’s interest rate swap designated as a cash
flow hedge.
-
61 -
(12) QUARTERLY RESULTS OF
OPERATIONS (UNAUDITED)
The
following summarizes certain quarterly results of operations: A 2-for-1 split of
the Company’s common stock became effective as of August 1, 2005. All earnings
per share in the following table reflect the stock split.
|
Net
Revenue
|
Contribution
From Dental Offices
|
Net
Income
|
Net
Income Per Share of Common Stock - Diluted
|
||||||||||||||
|
2005
quarter ended:
|
|||||||||||||||||
|
31-Mar-05
|
$ | 9,367,731 | $ | 2,095,604 | $ | 699,643 | $ | 0.26 | |||||||||
|
30-Jun-05
|
9,393,284 | 1,974,485 | 633,268 | 0.24 | |||||||||||||
|
30-Sep-05
|
9,264,449 | 2,115,191 | 414,390 | 0.16 | |||||||||||||
|
31-Dec-05
|
8,690,653 | 1,586,801 | 417,005 | 0.16 | |||||||||||||
| $ | 36,716,117 | $ | 7,772,081 | $ | 2,164,306 | $ | 0.82 | ||||||||||
|
2006
quarter ended:
|
|||||||||||||||||
|
31-Mar-06
|
$ | 10,140,029 | $ | 2,297,178 | $ | 702,325 | $ | 0.27 | |||||||||
|
30-Jun-06
|
10,091,469 | 2,235,422 | 623,166 | 0.25 | |||||||||||||
|
30-Sep-06
|
9,756,186 | 2,046,944 | 632,804 | 0.25 | |||||||||||||
|
31-Dec-06
|
9,399,312 | 1,873,295 | 364,679 | 0.15 | |||||||||||||
| $ | 39,386,996 | $ | 8,452,839 | $ | 2,322,974 | $ | 0.94 | ||||||||||
|
2007
quarter ended:
|
|||||||||||||||||
|
31-Mar-07
|
$ | 10,838,407 | $ | 2,688,123 | $ | 782,769 | $ | 0.34 | |||||||||
|
30-Jun-07
|
10,378,875 | 2,222,483 | 611,941 | 0.26 | |||||||||||||
|
30-Sep-07
|
10,077,204 | 2,077,900 | 635,040 | 0.28 | |||||||||||||
|
31-Dec-07
|
9,495,769 | 1,695,045 | 407,547 | 0.19 | |||||||||||||
| $ | 40,790,255 | $ | 8,683,551 | $ | 2,437,297 | $ | 1.08 | ||||||||||
(13) SUBSEQUENT
EVENTS
On
January 17, 2008, the Company announced the increase in the amount of the
quarterly cash dividend from $.15 per share to $.17 per share. On
January 23, 2008, the Company announced that the Board of Directors had approved
an increase in the authorized amount up to $1 million of stock
repurchases.
-
62 -
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Evaluation
of disclosure controls and procedures.
The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities and Exchange Act of 1932, as amended), as of
December 31, 2007. Based upon that evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures are effective, as of December 31, 2007, in
timely alerting them to material information relating to the Company required to
be included in the Company’s periodic SEC filings.
Management’s
Annual Report on Internal Control over Financial Reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of
the Securities and Exchange Act of 1934. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that
transactions are recorded to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are made only in accordance with authorizations of
our management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial
statements.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2007. In making this assessment, management used the
criteria set forth in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”).
Based on
its assessment of internal control over financial reporting, management has
concluded that, as of December 31, 2007, our internal control over
financial reporting was effective.
This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management’s report in this Annual
Report
Changes
in internal controls.
There
were no changes in our internal controls that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM 9B. OTHER
INFORMATION
None.
-
63 -
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
The
information required by this Item 10 is incorporated in this report by reference
to the applicable information set forth in the Company’s proxy statement for the
2008 Annual Meeting of Shareholders, which will be filed no later than 120 days
after the close of the 2007 fiscal year with the Securities and Exchange
Commission.
ITEM
11. EXECUTIVE COMPENSATION.
The
information required by this Item 11 is incorporated in this report by reference
to the applicable information set forth in the Company’s proxy statement for the
2008 Annual Meeting of Shareholders, which will be filed no later than 120 days
after the close of the 2007 fiscal year with the Securities and Exchange
Commission.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The
information required by this Item 12 is incorporated in this report by reference
to the applicable information set forth in the Company’s proxy statement for the
2008 Annual Meeting of Shareholders, which will be filed no later than 120 days
after the close of the 2007 fiscal year with the Securities and Exchange
Commission.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The
information required by this Item 13 is incorporated in this report by reference
to the applicable information set forth in the Company’s proxy statement for the
2008 Annual Meeting of Shareholders, which will be filed no later than 120 days
after the close of the 2007 fiscal year with the Securities and Exchange
Commission.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The
information required by this Item 14 is incorporated in this report by reference
to the applicable information set forth in the Company’s proxy statement for the
2008 Annual Meeting of Shareholders, which will be filed no later than 120 days
after the close of the 2007 fiscal year with the Securities and Exchange
Commission.
-
64 -
PART IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial Statements:
Report of Independent Registered Public
Accounting Firm
Consolidated Balance Sheets
-
As of December 31, 2006 and
2007
Consolidated Statements of Income
-
Years ended December 31, 2005, 2006
and 2007
Consolidated Statements of
Shareholders’ Equity and Comprehensive Income -
Years ended December 31, 2005, 2006
and 2007
Consolidated Statements of Cash Flows
-
Years ended December 31, 2005, 2006
and 2007
Notes to Consolidated Financial
Statements
(2)
Financial Statement Schedules:
Report of Independent Registered Public
Accounting Firm on Schedule
II - Valuation and Qualifying Accounts
-
Three Years Ended December 31,
2007
Because
the Company is primarily a holding company and all subsidiaries are wholly
owned, only consolidated statements are being filed. Schedules other
than those listed above are omitted because of the absence of the conditions
under which they are required or because the information is included in the
financial statements or notes to the financial statements.
(b) The
Exhibit Index lists the exhibits filed with this report.
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65 -
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
BIRNER
DENTAL MANAGEMENT SERVICES, INC.
a Colorado corporation
|
/s/ Frederic W.J.
Birner
|
Chairman
of the Board, Chief Executive
|
March
31, 2008
|
|
Frederic
W.J. Birner
|
Officer
and Director (Principal
Executive
|
|
|
Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
/s/ Frederic W.J.
Birner
|
Chairman
of the Board, Chief Executive
|
March
31, 2008
|
|
Frederic
W.J. Birner
|
Officer
and Director (Principal
Executive
|
|
|
Officer)
|
||
|
/s/ Dennis N.
Genty
|
Chief
Financial Officer, Secretary and
|
March
31, 2008
|
|
Dennis
N. Genty
|
Treasurer
(Principal Financial and
Accounting
|
|
|
Officer)
|
||
|
/s/ Mark A.
Birner
|
President
and Director
|
March
31, 2008
|
|
Mark
A. Birner, D.D.S.
|
||
|
/s/ Brooks G.
O’Neil
|
Director
|
March
31, 2008
|
|
Brooks
G. O’Neil
|
||
|
/s/ Paul E.
Valuck
|
Director
|
March
31, 2008
|
|
Paul
E. Valuck D.D.S.
|
||
|
/s/ Thomas D.
Wolf
|
Director
|
March
31, 2008
|
|
Thomas
D. Wolf
|
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66 -
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have
audited in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of Birner
Dental Management Services, Inc. for the years ended December 31, 2005, 2006 and
2007 included in this Form 10-K and have issued our report thereon dated March
31, 2008. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. This Schedule II –
Valuation and Qualifying Accounts is the responsibility of the Company’s
management and is presented for purposes of complying with the Securities and
Exchange Commission’s rules and is not part of the basic financial
statements. The information included in this schedule for the years
ended December 31, 2005, 2006 and 2007 has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Hein
& Associates LLP
Hein
& Associates LLP
Denver,
Colorado,
March 31,
2008
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67 -
Birner
Dental Management Services, Inc. and Subsidiaries
Financial
Statement Schedule
II –
Valuation and Qualifying Accounts
Allowance
for Doubtful Accounts
|
Description
|
Balance
at beginning of period
|
Charged
to costs and expenses
|
Deductions*
|
Balance
at end of period
|
|||||||
|
2007
|
$ 288,513
|
$ 664,304
|
$ 660,990
|
$ 291,827
|
|||||||
|
2006
|
$ 261,031
|
$ 722,622
|
$ 695,140
|
$ 288,513
|
|||||||
|
2005
|
$ 232,543
|
$ 673,613
|
$ 645,125
|
$ 261,031
|
|||||||
|
*
Charges
to the account are for the purpose for which the reserves were
created.
|
|||||||||||
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68 -
Index of
Exhibits
|
Exhibit
Number
|
Description of Document
|
|
3.1
|
Amended
and Restated Articles of Incorporation, incorporated herein by reference
to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange Commission
on September 25, 1997.
|
|
3.2
|
Amended
and Restated Bylaws, incorporated herein by reference to Exhibit 3.2 to
the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391),
as filed with the Securities and Exchange Commission on September 25,
1997.
|
|
4.1
|
Reference
is made to Exhibits 3.1 through 3.2.
|
|
4.2
|
Specimen
Stock Certificate, incorporated herein by reference to Exhibit 4.2 to the
Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as
filed with the Securities and Exchange Commission on September 25,
1997.
|
|
10.1
|
Form
of Indemnification Agreement entered into between the Registrant and its
Directors and Executive Officers, incorporated herein by reference to
Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (SEC File
No. 333-36391), as filed with the Securities and Exchange Commission on
September 25, 1997.
|
|
10.14
|
Form
of Managed Care Contract with Prudential, incorporated herein by reference
to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange Commission
on September 25, 1997.
|
|
10.15
|
Form
of Managed Care Contract with PacifiCare, incorporated herein by reference
to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange Commission
on September 25, 1997.
|
|
10.18
|
Form
of Management Agreement, incorporated herein by reference to Exhibit 10.18
to the Company’s Registration Statement on Form S-1 (SEC File No.
333-36391), as filed with the Securities and Exchange Commission on
September 25, 1997.
|
|
10.20
|
Form
of Stock Transfer and Pledge Agreement, incorporated herein by reference
to Exhibit 10.20 to the Company’s Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange Commission
on September 25, 1997.
|
|
10.23
|
Birner
Dental Management Services, Inc. 1995 Employee Stock Option Plan,
including forms of Incentive Stock Option Agreement and Non-statutory
Stock Option Agreement under the Employee Plan, incorporated herein by
reference to Exhibit 10.23 to the Company’s Registration Statement on Form
S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
|
|
10.25
|
Profit
Sharing 401(k)/Stock Bonus Plan of the Registrant, incorporated herein by
reference to Exhibit 10.25 to the Company’s Registration Statement on Form
S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
Commission on September 25, 1997.
|
|
10.26
|
Form
of Stock Transfer and Pledge Agreement with Mark Birner, D.D.S.,
incorporated herein by reference to Exhibit 10.26 of Pre-Effective
Amendment No. 1 to the Company’s Registration Statement on Form S-1 (SEC
File No. 333-36391), as filed with the Securities and Exchange Commission
on November 7, 1997.
|
|
10.27
|
Stock
Purchase, Pledge and Security Agreement, dated October 27, 1997, between
the Company and William Bolton, D.D.S., incorporated herein by reference
to Exhibit 10.27 of Pre-Effective Amendment No. 1 to the Company’s
Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with
the Securities and Exchange Commission on November 7,
1997.
|
|
10.45
|
Form
of Restricted Stock Agreement and Grant Notice under 2005 Equity Incentive
Plan, incorporated herein by reference to Exhibit 10.2 on Form 8-K (SEC
File No. 000-23367), as filed with the Securities and Exchange Commission
on July 19, 2005.
|
|
10.47
|
Fourth
Amendment to Second Amended and Restated Credit Agreement dated August 31,
2006 between the Registrant and Key Bank of Colorado, incorporated herein
as Exhibit 10.47 of the Company’s Form 10-K for the annual period ended
December 31, 2006.
|
|
10.49
|
Fifth
Amendment to the Second Amended and Restated Credit Agreement dated April
30, 2007 between the Registrant and Key Bank of Colorado, incorporated
herein by reference to Exhibit 10.49 of the Company’s Form 10-Q for the
quarterly period ended March 31, 2007 filed with the Securities and
Exchange Commission on May 15, 2007.
|
|
23*
|
Hein
& Associates LLP consent dated March 31, 2008.
|
|
31.1*
|
Certification
of 10-K report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
by Chief Executive Officer.
|
|
31.2
*
|
Certification
of 10-K report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
by Chief Financial Officer.
|
|
32.1*
|
Certification
of 10-K report pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
* Filed
with this Form 10-K.
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